On Thursday, I joined John Humphreys of the Australian Taxpayers’ Alliance and Professor Chris Berg of RMIT University for an ATA livestream discussion on productivity (see Productivity ideas with Chris Berg). One of the most interesting parts of the conversation was on artificial intelligence (AI), which I’ve repurposed for my latest Economics Explored podcast episode.
Thankfully, the Australian Government has so far resisted pressure—particularly from unions and lobby groups—to introduce heavy AI regulation. Instead, it has adopted a wait-and-see approach, unlike Europe, where regulation is already slowing the rollout of new AI tools. Chris welcomed this hands-off stance, seeing it as giving Australia a chance to capture the benefits of AI adoption more quickly.
One of the more provocative points from Chris was his description of AI as providing “effectively infinite intelligence.” I challenged this idea, suggesting that while AI can synthesise vast amounts of existing knowledge, true intelligence involves solving new problems. Nonetheless, I share his view that AI represents an extraordinary advance.
We also discussed who wins and who loses in an AI-driven economy. Contrary to the usual automation story, Chris argued that it may be highly educated professionals who face more disruption than low-skilled workers, since AI excels at writing, analysis, and other cognitive tasks. At the same time, concerns remain about those unable to use the technology being left behind effectively.
Beyond work, AI raises broader social and ethical questions. We talked about AI companions, therapeutic uses (such as support for people on the autism spectrum), and risks of parasocial relationships or loneliness. The potential benefits are real, but so are the challenges.
Finally, one of the more imaginative suggestions was that low-skilled work in developed economies could in future be done by humanoid robots remotely operated from overseas. This would create a new twist on globalisation and migration policy—an idea worth thinking through further.
Overall, it was a fascinating conversation, with plenty of optimism from Chris about AI’s productivity potential, tempered by my own caution about the risks and unknowns.
If you’d like to watch the whole conversation with Chris, you can check it out on the ATA YouTube channel. In addition to discussing AI, we also discuss Australia’s Economic Reform Roundtable.
This article is cross-posted at queenslandeconomywatch.com. Please send any comments or questions to show host Gene Tunny at contact@economicsexplored.com.
Wharton Professor Michael Useem joins host Gene Tunny to discuss his new book, Resolute Japan, which unveils Japan’s emerging shift in management practices fueling a corporate revival. Japanese companies are adopting ambidextrous management, empowering frontline employees, and embracing Western practices while retaining stakeholder-first traditions. He emphasizes the importance of top management in driving change and the potential for Japan to regain global economic prominence by learning from both domestic and international best practices.
Japanese companies are adopting innovative management practices, such as empowering frontline employees and embracing the “gemba walk” to better understand operations.
Japanese companies are retaining their commitment to stakeholders, including employees, the community, and the country, while also becoming more open to adopting Western-style management principles.
The concept of “ambidextrous management” is emerging, where companies are exploring new industries while exiting declining ones, demonstrating a willingness to adapt to changing market conditions.
There is an increasing openness among Japanese companies to learn from and adopt best practices from other countries, which is helping drive their resurgence.
The impact of top management changes can significantly influence a company’s performance, suggesting the importance of resolute leadership in driving change and improvement.
Transcript: Japan’s Corporate Comeback: Inside the Resolute Japan Model, w/ Wharton Prof. Michael Useem – EP260
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
SPEAKERS
Female speaker, Obsidian, Michael Useem, Gene Tunny
Michael Useem 00:03
Some of the impediments to competing globally, Japanese firms have begun to push back against those impediments, to adopt their own resolute method, and thus believe that companies everywhere in the world would behoove themselves to take a look at Japanese companies, close in if they have a partner, go to visit, walk around, what’s going on, what can we borrow back here in our home country that Japan is now mastering?
Gene Tunny 00:34
Hello and welcome to the show today, we’re joined by one of the foremost experts in corporate leadership. Professor Michael Yaseen from the Wharton School, and we’re talking about his new book, resolute Japan. In the 1980s Japan was seen as an unstoppable economic force, but the 1990s brought a sharp downturn, leading to the lost decades. Now, Professor you seems extensive interviews with top Japanese executives reveal how the country is experiencing a resurgence. Japan’s companies are adopting innovative management techniques, empowering frontline employees, embracing the gemba walk and incorporating Western practices while still valuing their stakeholder first traditions. In this episode, we’ll explore the remarkable resurgence we’re starting to see in Japan’s corporate giants. A special thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. Professor Michael, you seen Welcome to the program. Gene,
Michael Useem 01:53
thank you for having me.
Gene Tunny 01:54
It’s good to connect. About your new book, resolute Japan. Now Japan is, yes, it’s a fascinating economy. I mean, you set it up the book by talking about the the fact that Japan had a reversal of fortune. They’re all the concerns or, well, in the US in the 80s, about how potentially Japan could overtake the US. And then there was some really now they seem crazy predictions of the coming war with Japan and all of that. But then Japan had the economic crisis in the 90s and the lost decade. But now it looks like things are turning around. And part of that is a a resurgence in corporate Japan due to new practices. So this is the this is the thesis of your new book, resolute Japan. Can you tell us please? Well, one is that summary broadly correct about the thesis of your book. And two, how did you get interested in this topic. What? What motivated you to write this book? Please. Michael gene,
Michael Useem 03:04
the thesis is absolutely on, on the mark. And just to elaborate a little bit before about 1990 to paraphrase the title of a book by one of my professional colleagues, Japan, was number one. The growth rate was extraordinary. Toyota cars were being sold all over the world. Panasonic is a brand that everybody came to know. Some of the largest banks in the world were Japanese banks. And then came 1990 and Japan went off a cliff. And in fact, it lost not only a decade, but it probably lost three decades, as at least indicated by the big stock index for the Japanese or the Tokyo Stock Exchange, which at one point was close to a value of 40,000 and us, by the way, is just a little bit above that. So there’s a certain parallel here, we hope not, with what happened in Japan after in 1990 the index got to 40,000 and then it just the index went off a cliff. Japan went into reverse. Searches on Google for the name Japan dropped by about 80% so coming into that 1990 turning point, the adverse turning point, Japan had become a model and Gene if I can just be a little bit colorful about and I’ll get to your second question in a second about that period, I had attended a conference that included a number of practitioners, A number of business leaders, a number of academics. It must have been around 1989 everybody was talking about, how are we going to learn from Japan how to run an economy, or at least big companies? Because they seem to be extraordinarily successful, and we at the end of three days of lots of academic. Can practical talk somebody, a CEO of a company, in fact, said we haven’t come up with any sure fire way to learn how Japan does it. So what we actually ought to do is teach Japanese managers to be like us. If we can’t raise ourselves up to them, we at least can bring them down to where we are. Well, as it turned out, Japan needed no help whatsoever. On that, the index plummeted down to about a value of about 10,000 it’s now, though, over the last couple years, it’s not only a lost decade, it’s probably a lost three decades. It’s 1990 almost, well more than 30 years later, almost 35 years the index over the last several months has just come back to life and is up over 40,000 right now. It’s quite remarkable. It’s one of the great comebacks. And our book is based on interviews with a number of Japanese company leaders, typically chief executive officers. We wanted to know. We didn’t go in with this question, but we ended up asking it because it was pretty obvious. It was the big question. We went into our interviews with over 100 was 102 leaders of big Japanese companies with other theories at hand, or other indications of what we might find at hand, but what we did find in talking over the last couple of years with people who run these well known companies, some less well known, is that they have adopted a new set of let’s call them leadership principles at the top, which seem to be doing the trick. So Gene started to go on so long on that, but that’s the long and the short of it.
Gene Tunny 06:46
Okay, now we’ll get to those leadership principles. I think I want to explore what they are. But first, can you tell us about the methodology I’m interested so you’re talking with Japanese corporate leaders, so C suite executives, who did the interviews? Did you have Japanese speakers, or were they conducted in English? Can you tell us a bit about how the interviews were conducted? Please?
Michael Useem 07:11
Really good question. I’ll give you a little background on it too. I myself have interviewed many, many senior leaders, sometimes directors, non executive directors at companies in the US. I’ve done that extensively and recently with several other colleagues, we did a similar study of leaders of Indian companies. We’ve done subsequent to that, a similar study of leaders of non state owned large Chinese companies like Lenovo and Alibaba. And our method is very simple. We simply call up or write and then send an email message and then, if accepted for an interview, we simply get on the phone, or, in the case of India, we actually went to India and talk directly, informally with those and generally speaking, we’ve received a lot of yeses from people in that high office. They’re busy. We appreciate that, but explaining what we’re doing, they seem to be drawn to it. In the case of Japan, because of COVID, we worked with a Japanese associate, a Japanese colleague, who is now the dean of the Waseda business school, one of Japan’s major business schools. He’s fluent in English and obviously in Japanese. And he arranged for interviews, typically zoom based interviews with the 102 individuals, in some cases, they were conducted in English. That was great for us, and other circumstances, no, but we had a simultaneous interpreter working with us. So between to put a put a bit of a stripe, or maybe a to tie a bow around the question, we decided based on our prior experience. Certainly this was coming partly from me as well, not just my other colleagues, by the way, and working also with a Wharton colleague. His name is far beer Singh. Is professor of strategy here at the Wharton School, the professor in Japan, the Dean now of the waste of Business School is a professor of management, and we essentially set out to hear we looked at the data that you can find, publicly released data, of course, but we worked on the premise that the best way to understand what companies are doing, or one very Good way, is to talk with people who are doing it, chief executives, board chairs and beyond. So we talk to people who are on the inside of Japan’s amazing comeback, right?
Gene Tunny 09:52
Okay, and what were the practices, or what were the the innovations in leadership, in. Management that you found in your interviews, please. Michael, yeah,
Michael Useem 10:04
this is the key, sort of the key, central issue that we were trying to get at. What exactly are Japanese senior executives and some board members doing now to stage this remarkable comeback? And by the way, the comeback is being matched by investor interest. Even Warren Buffett is now increasingly looking at Japan for investment opportunities. All this is because the Japanese share prices of many companies are way up and on. Talking with the 102 it’s we’re a little bit like anthropologists. We’re listening, how does, how does everybody but what are they saying they’re doing? And then we look for the common themes across what we’ve heard, and they’re really three or four. Let me just mention maybe the two, most important, number one, they are shaking off in some of the traditions of Japanese management, which in the day prior to 1990 seemed to be a very good thing, no layoffs. Seniority prevails, pretty much a male dominated world of management. And since 1990 but especially in the last 10 years, some, not all, but many companies have decided, almost Australian us great style, to rethink how they manage by instead of kind of making pronouncements from the from a high cast list of what People ought to do, they the CEOs, sometimes board directors as well, have made a point to listen to their middle and frontline employees. Instead of telling them what to do. There’s a much, much more of an act of seeking out from the ranks what should do, which is a way of saying, let’s talk to management much if it’s the consumer products company, much more in touch with consumers of that kind, they know far better than somebody at headquarters where the market’s going what’s critical and for reasons we could go into Japanese new fairly recently appointed Japanese managers have adopted what is almost commonplace in the west and in Australia, which is to you are the chief executive, you have enormous authority, but in making decisions, what people are saying in the mid ranks, and even better, let’s talk to some consumers. Case in point, just, I’ll end on this, just to anchor the point, Lawson is one of Japan’s great call them convenience stores, a little bit like we have in the US, 711 and I’m sure in Australia, have similar stores, very convenient, often open 18 hours. In the case of 711 7am to 11pm Speedway is another brand here in the US. Lawson is akin to those brands convenience stores. And the tradition at Lawson, going way back, is the people at the headquarters would say, look at this store. You need to stock the following, and here’s how you need to sell, and here’s how you need to bring what you’ve got on the store shelves to the attention of local customers. But a new chief executive came in and said, This is nuts. The people in the stores know far better than I do from from afar, what people should have available on the shelves. Case in point, to make that very tangible, there are a number of losses stores near Fukushima, the nuclear power plants that almost went sky high after the tsunami of 2011 in Japan. And the store already, this is now more than a decade ago, the stores were permitted to stock what people needed. Well, around Fukushima, what they needed was water. They needed food supplies. They needed gasoline. And instead of that coming from Tokyo, kind of a top down instruction, make these things available. Store managers simply said, we have authority. We’ve been delegated authority to get the job done, and we’re going to do it. There are a lot of course parameters around that. It’s not just a free for all of course, but it is a management method that is more familiar to companies in many companies out countries outside of Japan. That’s my number one. That’s our number one finding is a willingness to adopt some of the principles that describe management of large companies and many in many countries in Europe, certainly Australia and New. Zealand and in the US. But before we go too far with that, what Japan has not given up, what these large Japanese companies has not given up is the commitment to multi stakeholder obligations that is, unlike in the US, where we tend to focus on total shareholder return, market value plus dividends paid out in the given year. It’s the currency. It’s sort of the currency of the land. Japan has long put a huge emphasis, you know this, your listeners will know this, a huge emphasis on stakeholders. That’s one of the reasons that they were typically knowing that employees are one of the great stakeholders. No layoffs for a long standing tradition, no layoffs and seniority. That the the point I’m making is just to round it out. And then back to you is that some, not all, I want to stress not all, but many Japanese companies have retained that commitment to stakeholders other than shareholders. So the community, the country, the employees still are at are right up there on the level with the big investors, the big institutional holders, the as we call them, in the US, sometimes the small investors, the widows who have their life savings tied up in stock, say, in general motors. In the case of, let’s make a Toyota the closest parallel to General Motors. The commitment there, we did an interview there. The commitment is to not only shareholders, but retaining what was pre 1990 the commitment remains very strong, to make certain that the country serves the society, the community, and the people who make the automobiles that come off the line. Gene back to you. Oh,
Gene Tunny 17:01
great. Yeah, very good. So on Toyota. That’s interesting. One of my colleagues, Nicholas, grew and who’s an economist as well. He’s often on the show. He used to work on auto industry policy in Australia. Well, we had a car industry once that it was protected by the tariff wall, that’s another story. We got rid of that. But he he visited, like, he tells a story about, you know, visiting the Toyota factory back in the 80s or something, and just how impressed he was with their production methodology and how they actually did listen to workers on the factory floor. This was 40 years ago. So it sounds like Toyota were all already well advanced in moving away from very traditional business models. But have they made more changes? Are they more flexible? Or you talk about ambidextrous, ambidextrous management? Can you tell us a bit about how has Toyota itself changed a bit more about Toyota, please? Yeah,
Michael Useem 18:05
yeah. Well, Toyota was pretty much already there back in 1990 the phrase that comes from the title of a book written by several US observers of Toyota, the machine that changed the world. It’s a book that probably many of your listeners and viewers know, a person named Womack was one of the authors. If you want to track that down, on one of the websites, the Machine that Changed the World in Toyota, going all the way back to the 1940s right after the war, developed a course, and you alluded to it, the Toyota lean production system, and it worked extremely well, and still does work well, and in fact, in the US, just to anchor the point, a year ago, Toyota emerged as the number one producer of automobiles sold in the US General Motors, our historic giant of auto making, which at one point had 50% of the US auto market back in the early 50s, is now exceeded in cars sold in the United States by Toyota. And that’s essentially, I think, traceable to the fact that Toyota, going way back, came up with continuous improvement the lean production system. There are many features to it, and in some respects, Toyota was already there. Other companies less so, less concerned with the microcosm of the production line. You know this, I’ve walked through a Toyota plant. It is a marvel to see in that the micromanagement of people on the floor is quite extraordinary, very disciplined. And I say that because I want to reference the fact that these Japanese companies have not given up what has historically defined some of their stronger manufacturing and management. Methods, but they have, though, in addition to those methods, the discipline on the floor, and there’s a long tradition of Japanese managers doing what’s called a GEMBA walk, which I love as a concept. I wish it happened more often in my own sandbox here, which is to go to where automobiles or maybe home products, if it’s the consumer company of that kind, where they’re actually made, and then even equally important, where they’re sold, to see how the company can add more value to the production and to the sale of the products. So gene, it’s again a long winded way of saying that what we call resolute Japan is resolute in its ongoing commitment to many of these methods that serve these companies very well back in the 1990s but then as some of those methods were adopted by Western firms in North America, Europe and, I’m sure, Australia, the advantage that Japan had in the world market began to erode against some of the international firms, non Japanese firms that were becoming very good at Japanese and their own management methods. Quick summary point is that Japan has in the last decade many companies, certainly not all, but many have not given up the good that they had prior to the falling off the cliff in 1990 but they have since, especially over the last 10 years, come to appreciate, and you referred to it earlier on, appreciate that sitting on assets that are no longer performing is not a good idea. They got to move off from that traditionally, that was hard because they had to lay people off that was resisted, seen as UN Japanese, and so some of the impediments to competing globally that became increasingly pronounced, some of the impediments increasingly pronounced after 1990 Japanese firms have begun to push back against those impediments, to adopt their own resolute method. And thus, to a quick final summary point. We believe, myself and my two co authors here, believe that the world, companies everywhere in the world would behoove themselves to take a look at Japanese companies, close in, if they have a partner, go to visit, walk around, what’s going on. What can we borrow back here in our home country that Japan is now mastering, without giving up its traditional some of its traditional commitments, which turn out to be an asset as well.
Gene Tunny 22:51
Okay, and do you have a hypothesis for how this has occurred? How? Why have these methods? Why are they increasingly adopted what you call this resolute Japan model, the RJ model. Is it out of necessity? Is it out? Well, I suppose necessity is driving a lot of this. But is it? Are they? Are they doing? Are they studying in in other countries, their senior leadership, are that? Are they going on study tours? What’s the what’s your hypothesis? Could you tell us a bit about that, please?
Michael Useem 23:22
I think it’s yes, yes, and yes, they have made pilgrimages to, I’m sure, to various enterprises in Australia. They’ve come to the US. We have many Japanese students, for example, in our in our business programs at the Wharton School, some sent by their company. These are sometimes people in their 30s and 40s, not just 2627 year old students. So that’s a yes on that. I think the care seems to be a kind of discipline. When the bubble burst, when the Japanese market that had hit a value of 40,000 tumbled down to 10,000 in the years that followed. You can imagine that boards of directors and senior managers were extremely vexed by that, and it did seem to open up their eyes to what could they borrow, what could they adopt, what could they bring in from other national settings, even if there weren’t a lot of examples within Japan at the time, I think also American and some of the larger elsewhere based consulting firms, which you know this, bring ideas from one company to another. Here are some ideas on how to think about your strategy, how to sell your product. What is one is a good time to get out of a sector. How do you get out of a given arena and get into a new arena that can be more productive? I think it’s the combination of all the above. We asked all of the 100. And two managers to help us understand their appraisal to that question. And there was no simple single factor. It was a combination of many to make that put that in the positive, though, I think it’s an era where learning from other companies, wherever they may be, Japan, China, we spend a good bit of time in India, Australia, New Zealand, US, Mexico, Canada. Good to take a look, especially at companies in your own industry that are doing very well, even if they’re not in your home country. And in fact, we’ve been running into people who have done what might be called industrial tourism. They’ll take off a couple months. They’ll go to visit Apple they’ll look in the US here though. They’ll spend a couple days at Walmart. What exactly, even if they’re not in either of those particular industries, smartphones, in one case, consumer products. In another case, we believe, and this is, I think, evident in the fact that many senior managers now do, and I strongly advocate this. Make themselves, put themselves on it. Let’s call it a sabbatical. They’ll take off for a couple weeks. One person we’ve interviewed at length took a three month sabbatical, the CEO of a US firm, bank, in fact, go take a look at what other firms are doing. Most of what they’re doing you can’t import to your home territory, but some things are good. That’s a way gene of saying good ideas, fresh ways of dealing with relatively tough global economy these days are invented, often not here. So if we’re into NIH, not invented here, we only look at our own ideas, which was part of Japan’s problem, you’re probably going to end up in a small niche cornered in by companies that have, have looked around, have got some really good ideas on how to make better products at a lower price.
Gene Tunny 27:00
That’s good that they’re, yeah, they’re open to those, those ideas that they’re they’re flowing in. Because maybe this is more of a gratuitous comment, but Japan is, I suppose, seen by many, as a bit of a closed society or a hard society to to get into. And certainly they have very low immigration, like I looked at the OECD Economic survey for Japan before I popped on this call, and the population projections are just dreadful, and that’s that’s seen as a potential challenge economically. So perhaps they need to be more open to immigration. You know, they could absorb some of the immigration that some of the Western economies are taking and which are causing sort of growth problems for us now, and absorbing them anyway. That’s, that’s a good that’s a gratuitous comment. You don’t need to respond to that. But I just, I was, it just occurred to me when you were talking about their openness to ideas, well, maybe they could be a bit more open in other areas. So yes,
Michael Useem 28:04
and then to add one more area to that list, from my standpoint, you’re totally on the money. Japanese management is still very male dominated sport arena, and I think in time watching what’s happening in many European countries, maybe above all Scandinavia, but also even here in the US, the inclusion of women in middle and senior management ranks and going on to boards. Those trend lines in many countries are strongly up, not yet up in Japan, although there is some movement, and I actually think in time, excluding half the population from consideration of employment or service on your board seems a little bit arbitrary. I think because many Japan companies are open to ideas now not invented here, including the fact that we may want to look for people who didn’t grow up in Japan, aren’t Japanese citizens, aren’t of the male persuasion. I think next five or 10 years, stay tuned. We’ll see where that goes. But I’m cautiously optimistic that we’re going to get some movement and all the above.
Gene Tunny 29:18
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 29:53
now. Back to the show. I’d like to ask about this concept of ambidextrous. Business Management. You talk about Panasonic and how it it ended up with a new CEO for Amber, dexterity. Can you tell us a bit about that, please? What happened with Panasonic?
Michael Useem 30:12
Yeah, yeah, sure. Well, maybe just to back up a little bit and add one more element to what’s what are pushing some of the changes we’ve been talking about, everybody can change. I teach a whole course on organizational change, so I’m optimistic that we’re not born as an a person for the rest of our lives. We can make changes. Some of the changes come hard, but they can be embrace and in our experience with these interviews, many of the companies that had not changed after Japan went off that their company went off the cliff with the other companies back in 1990 new management came in and said, the way we’ve been working in the past is nuts. And so we did see that that a number of companies, and Panasonic is one of those. And if you think about, what does it mean to be open to change if you’re running a company like Panasonic or Hitachi? Hitachi, by the way, 300,000 employees Panasonic, not as many, but these are just enormous companies, and they’re in many markets and ambidexterity, to use that phrase you used a few minutes back, as people become more ambidextrous, senior managers become more ambidextrous, what that means is they are more Ready to get out of a declining industry and more ready to even if they’ve never really been in some new terrain to get into it. So you need to exploit what you’re already good at. But you also need to know that DVD tapes, at one point were like number one around the world if you wanted to watch a film. But that industry died as streaming came along. Netflix in the US made that change. Blockbuster arch rival did not make that change. They were not ambidextrous. They were not willing to get rid of the DVD format in favor of the streaming service. Revision of films and beyond. So ambidexterity slowly coming, but definitely coming to Japan. It’s worldwide. Means that senior managers, probably in consultation with consulting firms, are working hard now about how do we get out of an industry that doesn’t have much of the future. Let’s go explore and see if we can’t get into something else. One person we spoke with at another company put it this way. He said to his senior team in in 10 years, 2030 this was an interview a couple years ago. Now, by 2030 I want 80% of our income to come from five sectors we’ve not been in before, and here they are. So kind of starting from scratch. And it was, I think, a good move, because the sectors he wanted to get into, one of his senior managers to pursue actively turned out to be growing, and other areas were dying. So ambidexterity references the call it the portfolio and a willingness new part of the resolute Japan to exit areas that are that are ultimately slated to phase out. Think about what digital has done to so many areas of business these days, and with some trepidation, you want your managers to explore, where else can we go with what with the strengths that we have, with the capabilities that we’re good at, that we wouldn’t even think of as necessarily part of our own company? Anyway, I think Panasonic is out there. Is that the frontier of doing exactly that Gotcha.
Gene Tunny 34:01
So which company was it that wanted, just so I get this right, what was the company that wanted to have 80% of its revenue coming from five new business lines? Is that Panasonic? Or is that another company?
Michael Useem 34:17
That’s another that is another company, but we heard the same thing in Panasonic, not quite so sharp edged, okay, but, you know, I’ll throw a phrase at you which kind of sums up the point when it comes to leading enterprise, what got you here won’t get you there. So we were really good at, for example, producing DVD players, but that got us, that got us to our executive vice president title. We were excellent at managing that technology. But those that are following us in these elements. Positions aren’t going to get ahead by doing the same thing. So it’s almost an axiom of leadership. If you’re good for four or five years with the fundamentals, thinking, strategically, communicating, persuasively, those don’t change, but the specifics do, and thus, what got you here in terms of what you’ve managed, will not get you say that the year 2030, and many Japanese firms that we interviewed, we heard a refrain, not in so many well, in so many words, not quite the same phrasing, but in so many words,
Gene Tunny 35:33
gotcha. And I think what I found interesting about the book is you do think you highlight the areas where Japan is still, it’s still strong and very, some very high tech production techniques, isn’t it? Is that, right? It’s involved in, yes, yeah. So there are there, they do still have a lot of there’s still some advantages and things that they’re doing very well,
Michael Useem 35:58
absolutely. And that’s why resolute seem to us to be the right title, because there’s it really refers to the attitude of top management, and that is a resolute determination to take what they do well, to borrow from other national settings, not to mention one another, to adopt the best practices for getting the job done the product sold in a way where consumers, or other business consumers, really want the product that the price offered. They are determined to kind of revamp how they getting the business done, which is a way of saying, this is at the micro level, the macro questions, which are the presume the the preserve of economists with wonderful insights into what can stimulate or discourage, say, Japanese business, all that’s very important. Let’s call that the macro drivers. But at the micro level, the people that go to work every day and run the enterprise, they have stumbled on resolutely, a new set of practices that we think are going to bring the Japanese stock market, that’s one of the macro consequences above where it is now, and bring back some of the Japanese competitors that the US competitors feared back in 1990 But for the last 30 years, I’ve not paid much attention to and we think that in time, companies, it’ll take a while, companies around the world are going to increasingly stop off in Tokyo, as they are looking for best practices around the world. Japanese resolute management or leadership, is one of the topics they need to take a look at.
Gene Tunny 37:43
And the book you mentioned that like, while this resolute Japan model is growing in, in in the adoption of it, it’s still only a minority of companies, isn’t it? Is it still? Is it 10% or so you said? But perhaps, yeah, right, yeah, right.
Michael Useem 38:01
There are beach ball and beach heads. But because I think that those that are in that 10% or whatever it might be, it’s still a minority, are bringing back the luster of their brand, the value of their products, not only in Japan, but worldwide, making Japan actually no wonder the stock market is up. These companies have become more competitive those that have been at the frontier. And we think that other other Japanese managers, or certainly a new generation of Japanese managers coming up the ranks, whether at JL or Nissan, they are going to, just by looking around thinking, they’re going to be thinking, well, look these, these companies that are our neighbors, maybe not in the same industry, they’re making pretty good headway. And just to make it a little bit more tangible, one of the one of the observations, or one of the extracted conclusions from our interviews is that Japanese managers, senior managers, increasingly, do not stand on their station. They’re willing to get out of the corner office to get out to where the this is the gemba walk to where the product is being made and sold, and to not tell people what to do when they’re there. This is what Elon Musk tends to do, as I think you know from his management or his ownership and management of Tesla, he not only walks the line, but he tells people then how to improve the line. In the case of these Japanese managers that are out of the corner office onto the shop floor, working with customers at Lawson’s directly. They’re on listening tours. They again, they said this to us. This is one thing we picked up. We say, Well, why would you go to a local store in the case of Lawson? Well, I kind of want to know what’s going on. How do they sell what? What do customers want these days? That’s. Different so gene, I think this is one of the, maybe the hidden engines of change, which is, and there’s a long tradition in many national economies of looking for better ways of getting a job done in management, by looking at what high performing companies are doing that are new, fresh and something that we could adopt resolutely and try in our own enterprise.
Gene Tunny 40:28
Yep, very good. So I found the bit in your book. I like this. There’s a good list of worldwide markets that Japan is dominating in a wide variety of product niches, and I think it’s a really good list, and I’ll just read a couple of them, silicon wafers. Japanese companies account for 60% of the global share of silicon wafers, for making semiconductors, bearings, so something probably not a lot of us think about. And there’s three companies, Japanese companies accounting for 34% of the global market. And there are variety of other important products there for manufacturing. So I think it’s, I think your book is useful just in that regard, and learning about what Japanese companies are doing its role in the global economy. So, I mean, I recommend it, because I think your thesis is an interesting one, and there’s some good evidence there. And also, yeah, all of the you know stuff, all of the information and knowledge about the Japanese economy and its role in the in the global, global supply chain. So I think that’s, that’s really good, right? Gene.
Michael Useem 41:34
Think, yeah, thank you, Annette. And just my, I guess, of going away thought, here is, how do we learn more about how these companies that are making semiconductors and ball bearings and glass and construction and equipment and auto electric autos? How do we learn about what they’re doing? Lots of commentary and business periodicals about that these days, Japan has kind of come back in terms of our paying attention, but in my own humble view, thinking about, how do we learn to lead what we have not let’s make it semiconductors. How do we acquire the capabilities to build a Fab Lab, a billion dollars at least, to put that up. And then how do we make the best of what we’re doing once we’re there? I actually think there’s no better way to understand that than to pay a visit to those that are doing it. And I say that gene in part because we run a program, and I’ve learned, I guess, through experience, we run a program for CEOs, and they so think about that a CEO who, at that point in life, pretty much knows everything about everything, marketing, finance, operations, how equity markets operate. And nonetheless, the CEOs they do come there, these are often new CEOs who want to learn more about the art of being at the top of a rather big pyramid in some cases. But having said that, I’ve noticed that they pay special attention to other top executives and directors in that new CEOs trying to learn the trade or the craft of being a company leader, I tell them to, you know, take a course, for example, at a university along the line, pick up a book or two. But above all, I’ve noticed, and I reinforce this now, spend some time with people who are making the changes, who are leading the new way of doing business, and you come back with a proof of concept and a couple of concepts that are going to make the difference. So going to Japan, taking a look, no better way to learn it than to see it.
Gene Tunny 43:54
I think that’s right. You’ve got time for two more questions. I hope. I think they might be, should be quick ones, one. I’m just wondering, are you talking to any economists, or any economic researchers that you know of interested in quantifying the contributions to Japan’s, you know, stronger economic performance in the last, what, several years, or whatever it is, or decade, relative to the period before in from 1990 through to the early, mid 2010s I suppose, because I think this is, you know, potentially, these new management practices part of that. But I’m not sure what fraction of that improved performance that account for. So that’s just wondering, if you, if you know of any research going on there. So
Michael Useem 44:43
gene, I don’t know of any research going on directly by economists just way outside my my field of knowledge, having said that, it’s really important to take those factors into account. Interest rates. So the Bank of Japan has been trying to shake off the senevolence of the last 35 years with various central government edicts that change how interest rates or what they are, for example, and other methods to try to stimulate the economy. Really, really important. But gene, here’s a summary way of thinking about the world we’re in. There are several really good studies of the impact of top management, aside from the world you’re in, the province of, say, economic research. What is the impact? For example, here’s how the research goes, what is the impact of a change in the top person at a company? Same kind of research is done for sports teams. So think about a rugby team, or, in our case, a US style football team, where the research has been done, if we don’t change the rules of American football, if we take the bulk of the sports club with the same players, the same venue, the same fans, and then we change out the general manager or the head coach and watch what happens next season. Same thing has been done for private sector companies in the US, the right or the wrong person, the right or the wrong management philosophy at the top can make as much as 20 to 30% difference within the next 12 to 36 months. What next one to three years? It’s a way of saying, I think, to come back to what’s implicit in your question, in in the Japanese government itself put forward policies, and it’s been working, by the way, in reforming governance in ways that I think are going to be very productive, new rules that guide board behavior, just as you had in your country. We certainly have had a lot in the US after the failure of Enron some years ago. All that’s really important. It’s part of the story of how we bring companies into the into the current era in the best possible sense, and how do we help them get the best possible job, job done, the best best possible performance out there. But having referenced all these, those call them more macro factors, very important. At the heart, at the end of the day, also at the heart of what’s going to make a difference is who is running the show, and what precepts or capabilities do they do they bring? Yeah, and I’ll end on I was a little bit shocked when I saw the data on sports teams. I’m thinking, if you got a great group of players, yes, a new manager coming in, a new coach, is going to make some difference. Maybe move a few players around in the positions they play, bringing over the next couple of years, new new players on the payroll. But in the short run, if you bring in a coach or general manager who knows a lot about how the sport should be played, they will increase the one loss record by up to 20 or 30% within one to three years, regardless of the context, regardless of everything macro. Yeah, and that the gene is why we actually focused, in this case, not on the macro factors, which are, among other aspects of Japan, widely researched, especially by economists. But we decided to take a look at the people who actually run the show within those macro factors. And they find some find leverage. They find the ways of making a difference in the affirmative sense, aided, by the way, now with some wind at their back, because Japan has been trying to shake off its senevolence for some years, which is, I think, by way of summary, saying, I think we need the micro. We need the macro, if we’re looking to understand the Japanese economy and it’s opportunities for comeback. Absolutely,
Gene Tunny 49:02
that’s a, it’s a good point about, like you made the point about sports. You really see it in sports teams. And I can’t think of any American examples, but the one of the classic sort of British examples is Alex Ferguson at Manchester United. So, you know, led to a really, you know, great period for that, for that club. So very good, very good point.
Michael Useem 49:27
If I can intervene here for just a second, here would be two examples in the US that will show up in your experience, in your home country, in the business sector, let’s take two big companies. Let’s take Disney, and let’s take Starbucks, and if we want to appreciate what they’re going to be doing in the next four or five years, both have been very troubled. Both have replaced their CEOs. We’ll see how it goes. Starbucks, I think, as you know, has. A triple boomerang CEO. So the famous port Schultz, who got it going retired, was called back retired a second time, has now be called, has been called back a third time. And I personally think same as your illustration from from football. I think that we’ll see what they bring to the table. It hopefully is positive. It may not necessarily be, but hopefully it is that they’re taking the helm, regardless of everything else that affects the ability of Starbucks to sell coffee and just make it in Melbourne or Disney to have its film shown or locally available by virtue of a whole host of economic factors. I think the person at the top can, and often they do, make an enormous difference, fairly short term, in a football in a football league or in the s, p5, 100 here in the US, absolutely.
Gene Tunny 51:04
Okay. My final question, Michael, it’s reading through the I read the OECD Economic survey of Japan, the 2024 before I like when I was preparing for this call. And there was a part of it that I’m wondering about, that they make an observation. And given your research, I’m wondering if their observation is perhaps it’s a like, I guess there’s truth to it, but maybe it things are changing, and things aren’t as bad as the OECD is. Yes, I just like to get your reaction to it. Yeah,
Michael Useem 51:41
yeah, no, I think there’s good reason to be pessimistic. We’ve touched on some of the factors that are still barriers, and some of those factors, I think, are not going to be readily thrown off as barriers in the short run. Having said that, there are enough companies that are adopting some of these new methods, greater focus on getting out of industries that are dying, getting into sectors that are prospering. A new kind of management at the top, a willingness of people in the corner office to get out of that office and walk the floor and get more directly acquainted and bringing ideas up from from the shop floor. I think these over time and time might could be five or 10 years, maybe more than that, are probably going to erode some of the other factors that mitigate against Japan’s comeback. But the comeback, I think, just to maybe a summary line on it, the sun back is significant enough and affecting enough companies that I think we’re getting close to a tipping point where companies that are still languishing are probably beginning to think, Well, geez, I’m looking over my shoulder. Hitachi is coming back. Panasonic is doing pretty well. The airlines are pretty competitive. We’re selling Toyotas like crazy in the North American market. How come my company is still kind of in the doldrums and so gene on that, I guess on that note, I end, uh, optimistically, but it may take some years,
Gene Tunny 53:15
okay, so, but it may be right for the OECD to write, then business dynamism is weak with relatively few startups. So they’re talking about, yes, yeah, okay, so there are some issues there, but you’re optimistic because you’re seeing these, this resolute Japan model, and the the trend is that that’s being increasingly adopted. And they said, That’s good news. Yes, yes,
Michael Useem 53:42
yes, yes to all the above. And maybe gene a question in the back of your mind, and certainly in the back of my mind, well, what exactly is moving the needle? What will the move the needle in the next five years? That leads one to be optimistic in the Warren Buffett sense, I’m going to put some money in Japanese stocks the way I haven’t in the past, and I think it’s because of the rational calculus that senior managers bring to the table. So imagine you’re the new chief executive of Lawson, the huge convenience store chain in Japan. And let’s say you’re one of the languishing firms some years ago, and you begin to say, well, what can I do? Well, you talk to maybe make a visit to Germany or the US or Australia. You talk to some of the people over at Toyota. You bring some of them maybe onto your board, which, by the way, is another driver of change we haven’t talked about, but refreshing the board, bringing new people on the board, bringing people onto the board who can speak independently to you as the top executive, is part of a bigger story that we could talk about some other time. So. Uh, by way of putting pulling all those factors together, if you are kind of in your office, you’re a 55 year old senior, let’s make it a chief executive of a Japanese company that just can’t seem to increase its revenue, let alone its income much over last year, you’re saying, Well, why is that? Especially when you see some other companies doing quite well. So I think it’s the contagion of success that is going to move, maybe not the government or policymakers, although they help in their own special ways, but are probably going to move individual people to say, just like you look at another sports team, well, what is it, in our case, that makes the New York Yankees or the Los Angeles Dodgers such great baseball teams? Well, their budget is one factor, but there are lots of other factors I’d like to find out what the other factors are.
Gene Tunny 55:59
Yeah, very good. We better wrap up there that that’s been terrific, Professor Michael, you seem co author of Resolute Japan. Thanks so much for coming on to the show. Really appreciate your insight. So I’ll put a link in the show notes to your book. I recommend if you’re listening, I think, and you you’re interested in Japan or management, and you know, management’s important for economic performance, so of course, I think it’s important to consider. So yeah, please consider getting a copy of the book, Michael, again, thanks so much for your time. Really enjoyed the conversation.
Michael Useem 56:34
Thank you. I appreciate the questions right on the mark. Let’s keep an eye out. We’ll hope Japan’s going the way it seems to be going.
Gene Tunny 56:42
Thank you Absolutely. Thanks. Michael Righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
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Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
Marian Tupy, a senior fellow at the Cato Institute, discusses his book “Super Abundance” with Gene Tunny. Tupy argues that resources are becoming more abundant relative to global population, a concept he calls “super abundance.” He explains that human ingenuity has led to cheaper commodities over time. Tupy refutes Malthusian predictions of resource scarcity, citing examples like the Haber-Bosch process for synthetic fertilizer. He also addresses environmental concerns, emphasizing that economic growth and technological advancements can mitigate issues like ocean and air pollution and resource depletion.
You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.
About this episode’s guest: Marian Tupy, Cato Institute
Marian L. Tupy is the founder and editor of HumanProgress.org, and a senior fellow at the Cato Institute’s Center for Global Liberty and Prosperity.
He is the co-author of the Simon Abundance Index, Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet (2022) and Ten Global Trends Every Smart Person Should Know: And Many Others You Will Find Interesting (2020).
His articles have been published in the Financial Times, the Washington Post, the Los Angeles Times, the Wall Street Journal, The Atlantic, Newsweek, the U.K. Spectator, Foreign Policy, and various other outlets both in the United States and overseas. He has appeared on BBC, CNN, CNBC, MSNBC, Fox News, Fox Business, and other channels.
Tupy received his BA in international relations and classics from the University of the Witwatersrand in Johannesburg, South Africa, and his PhD in international relations from the University of St. Andrews in the United Kingdom.
Transcript: Abundance Mindset: Exploring the Super Abundance Thesis w/ Marian Tupy, Cato Institute – EP258
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Marian Tupy 00:03
The air in western rich countries is now cleaner than it has been since before industrialization. If you look at the Yale index of environmental protection and then you compare it with GDP per capita. If you combine these two statistics, what it shows you is a very strong correlation between income per capita and Environment Protection.
Gene Tunny 00:35
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. Today, I have a fascinating conversation with Marian TUPE, senior fellow at the Cato Institute, and co author of the book super abundance. Marian dives into an optimistic view of the future, highlighting how human ingenuity has consistently overcome perceived limits on our resources, even with a growing global population, we delve into the famous Simon Ehrlich wager with Marian, explaining how exploration and innovation mean that we continue to defy Malthusian predictions of decline. Toward the end of the episode, we shift gears and discuss migration, exploring its impacts on housing affordability, public service delivery and social cohesion. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored. Listeners. Details are in the show notes. Okay? Without further ado, let’s dive into the episode. I hope you enjoy it. Marianne TUPE, welcome to the program.
Marian Tupy 02:14
Thank you very much for having me.
Gene Tunny 02:17
It’s excellent to have you on so you’ve written a really interesting book called super abundance, and it’s on an issue that I think about a lot, which is on the Limits to Growth, whether there are limits to growth, whether we need to move to something called degrowth, which is becoming popular in certain circles. To begin with. Marion, could you tell us a bit about what is this concept of super abundance that you have? Please?
Marian Tupy 02:49
Well, super abundance is not just name of the book. There it is. It is also a it’s got a technical term, which is to say, when resources are becoming abundant at a higher rate than population growth. Because, why? Why bother about the link between population growth and and resources? Because, because, when people think about population growth, they usually think that there is sort of a fixed pie of resources, and the more people you have, the fewer resources you end up with. So you know, if you have 10 people at dinner, you know you have so much food to go around. If you bring 100 people to dinner, everybody has to do with a small plate, because, you know, more people are going to exalt resources more quickly. But of course, humanity is different. Humanity can grow the size of the pie. Humanity can bring additional resources to dinner, so that even 100 people can get fed, even 1000 people can get fed, or, for that matter, 10 billion people can get fed. But anyway, the point is that for the longest time, people were worried that as population increases, we will run out of resources. And in fact, what we found was that resources are becoming cheaper. And in fact, abundance of resources increasing at a faster pace than population. That’s what we call super abundance,
Gene Tunny 04:05
right? Okay, so what sort of resources do you mean are becoming cheaper? This is the majority of commodities you studied. Could you tell us a bit more about that please?
Marian Tupy 04:15
Yeah, I guess it’s useful to actually start by defining resource, if we can. You know, people talk a lot about natural resources, but I think that’s a bit confused. I think that you should really start by thinking about natural endowment, or you should talk about raw materials. You know, raw materials such as whatever minerals in the crust of the earth, metals, things like that. And when you apply human intelligence to raw materials, you end up with a resource. So take just soil, you know, it’s a it’s a raw material. It’s it’s that. But when you apply human ingenuity, such as, you know, using it in order to grow crops. Then the resource becomes wheat, right? And so in the book, we look at hundreds of different types of commodities, really, which is to say food, fuel, minerals, metals, and even, actually some services. But that’s that we can talk about it later. But the bottom line is that we look at, we could look at traded commodities, anything from uranium to zinc to iron to wheat and barley and oil and natural gas. Basically, you know, we start with the big 50, which are, which are measured, or rather, which are, which are being tracked by the IMF and the World Bank, and then we expand it going back 170 years. But yes, so, so there are these raw materials, and when you apply human intelligence to them, you get resources. That’s essentially how we define resource.
Gene Tunny 05:54
Okay, so have you established some stylized facts about the prices of these resources? Is that the main point of the book, and can you just go over that again? I just want to make sure I understand is, are you saying there’s a general tendency for them to become cheaper, or is it on average, they’re becoming less expensive, or is it the majority? Or is it a just one, a bit bit more to understand. Is it? I mean, are you trying to are you proclaiming a general law of super abundance? I just want to understand what, what your thesis is exactly.
Marian Tupy 06:27
Yeah. So usually, when people look at resources, they look at a real price of resources, meaning, you take a price of resource in, say, 1900 you compare it to a price of resource in 2000 you discounted for inflation, and that tells you whether something has gotten more or less expensive. Now, we were dissatisfied with this kind of analysis for a simple reason. We wanted to take the resources back in time as much as possible, and we wanted to include as many countries as possible. Now, when you start looking at resource abundance from a global perspective and over hundreds of years, you quickly run into a problem, which is, you know what happens to exchange rates? You know what happens to inflation rates? What if you don’t have inflation rates in 1850, or 1900 you know, how do you deal with it? And so we came up with a different methodology, which is called time prices. Basically, what we look at is nominal wage per hour, and we look at nominal price of a resource. So let’s say, let’s, let’s give a stylized example, a pound of beef costs you. Let’s say that you are making $20 an hour in the United States, and a pound of beef costs $20 Okay, so a pound of beef will cost you an hour of later, but if in 50 years time, the price of beef may go up to $40 an hour, but you are now making $80 an hour, then now you have two pounds of B for an hour of work. So everything we do, we do in terms of time cost or time price, it’s really the nominal price of something relative to nominal wage that you are making at the time of the purchase. And the beauty behind time prices is that inflation doesn’t matter because you are only dealing with nominal prices and nominal wages. So it doesn’t really matter whether the inflation is 10% or 1,000,000% over the intervening period, because you’re looking only at nominal prices, then it doesn’t really matter. And also, an hour of work is the same in Australia as in the United States, as in China. So that way you can basically make these comparisons between different countries over different periods of time, in in a in an intellectually honest and methodology methodologically sound way. Did that make that make any sense? Yeah,
Gene Tunny 08:56
yeah, that that does make sense. Understand what you’re what you’re doing there. I mean, I think the general point you make is a is a good one. And I mean, you go back long enough. I mean, you go back to the I mean, I remember when I was in school and we were hearing about the limits of growth and all of that, and and then that was, you know, before we had the rise of China and India and, you know, massive expansion of global trade world, GDP. More recently, we’ve had peak oil. That was prior to the financial crisis, that that proved not to be really something that we’re at yet, or at least doesn’t, we don’t appear to be at it. And so, yeah, I guess I’m very sympathetic to the argument about about super abundance. Can I ask? Is this a continuation of the work that Julian Simon has done? Is this because I see on your CV or your bio, you’re part of something called the Simon. Project. Could you tell us what that is and whether this is continuing his work? Yes, yes,
Marian Tupy 10:05
yes, absolutely. So. Julian was a, obviously, a huge inspiration, but so he was actually a senior fellow at Cato before I joined the Cato Institute. He died in 1998 but he was senior fellow there, so we never met. But what I wanted to do back in 2017 is to look at his work and update it, you know, to the present. And I found that his bet with with Ehrlich, he would still win. In other words, commodities continued to get cheaper, at least the ones that Julian looked at, but I was using the old methodology. I was just looking at real prices of commodities. And my co author, Gail Pooley, got in touch with me, and he says, well, let’s turn them into time prices. Let’s look, let’s look at the price of commodities relative to wages, how much more you can buy for an hour of work than your ancestors could. And then we published a paper in 2018 with this new methodology. And indeed we found, once again, that Julian was right. And then we decided to turn into a book which goes back to 1850 and basically what we find is that commodities, relative to wages, are constantly getting cheaper. If it’s a long enough period, everything is getting cheaper, including gold. The only thing that continues to become more and more expensive over the centuries is human labor, essentially the human input. And we might as well talk about Simon and Ehrlich wager, right? Yes, yes, yes, yeah, please. So Julian Simon, since we mentioned him, he was an economist at the University of Maryland, here in the United States, and he was basically looking at the data. And he was noticing that things were getting cheaper, even though population was expanding whilst over in California, at Stanford University, Paul Ehrlich, who is still alive, he’s 93 years old now, was predicting doom and gloom. He was basically saying, you know, as population increases, we are going to run out of everything, and there’s going to be mass famine. And, you know, starvation of hundreds of millions of people. And so they had a bet between 1980 and 1990 on the price of five commodities, nickel, tungsten, tin, chromium and copper. And basically, they made a futures contract for $1,000 and when the period came to an end in 1990 Ehrlich had to send a check for $576 to Simon, because commodities became 36% cheaper. Had Simon implemented our methodology, he would have won even bigger. He would have won by about 40, 42% rather than 36
Gene Tunny 12:45
very good. Yes, yeah, that’s, I’ll put a link in the show notes to that, that wager. Yep, I remember that because I think that was still very when I, when I first started learning economics, I think that wager had just, it had just been decided, and yes, it Yeah, certainly in Simon’s favor. But yep, I mean in terms of this idea of the limits to growth, or the, you know, how many earths we need to support ourselves, which is something I think you and your co author, Gail, were were reacting against, because in the blurb for your book, it goes generations of people have been taught that population growth makes resources scarcer in 2021 for example, one widely publicized report argue the world’s rapidly growing population is consuming the planet’s natural resources at an alarming rate. The world currently needs 1.6 Earths to satisfy the demand for natural resources, a figure that could rise to two planets by 2030 now what I’m interested in, Marion, have you thought about like your analysis? You’ve looked at it over. Was it 150 years or a couple 100 years? 170 170 What are you by the way,
Marian Tupy 14:05
it’s 170 because that’s, that’s all the data that we could get. Yeah. Gotcha, yeah.
Gene Tunny 14:09
What are your thoughts on where we’re going? Because we’re still, I mean, up until, say, 2070 or 2080 we’re still going to have growing global population. We still have rising living standards in well, we’ve got convergence catch up in China, India, other emerging economies. Do you think this super abundance thesis will hold despite this continuing economic growth? Or do you have any? Do you have any concerns? How confident are you in the this super abundance hypothesis?
Marian Tupy 14:47
I’m 100% confident I’m not investing in commodities, and I wouldn’t, unless you know I think that there would be a good hedge against inflation. But. No, I don’t think that commodities are going to, you know that they are, that they are going to somehow explode in price. Now, before I answer that question, let me make a couple of points. So the world’s population is going to peak at about 18, sorry, 2065 maybe 2017 and it’s going to start declining. But the question over population growth and resources that’s remains relevant, even if population plateaus and even starts declining, because the expectation is that as we become richer, we are going to be using more resources. We are going to be consuming more resources. So it’s very important to understand the exact relationship between population growth and resource abundance. But but my prediction is that even if that, even if population continues to grow, or even if plateaus, or even if we just start consuming much more resources than we currently do, we are still going to have more abundant resource based and then we currently do for a simple reason that human ingenuity just doesn’t stop. I mean, human ingenuity depends on population growth. So the more people you have, the more ideas you are actually going to have in order to increase your resource base, right? So as I said, you know, in the olden days, maybe you could produce 40 bushels of corn or wheat per acre of land. Now you have 200 bushels of wheat per acre of land. That’s human ingenuity that is applying scientific methods, GMOs, genetic modified organisms, that is applying modern fertilizer, modern watering techniques and whatever else, and pesticides and fungicides in order to produce more food. That’s, that’s, that’s really, that’s all comes from the human mind, right? And so the more people you have, the the more opportunity you have to come up with new ideas. So what are the new ideas? One we can increase the supply of resources simply by discovering new fields, or, for example, oil, gas or whatever else, much of them continues to be unexploited, and certainly on much of it hasn’t even been properly, properly. You know, checked for for resources, we don’t really know how much oil or gas we have, how much iron we have, how much, how much other metals or minerals we have, because we have only explored a tiny percentage of the world. Secondly, we can of the planet. Secondly, of course, we can increase our technology so it enables us to get to resources which were previously uneconomically expensive. So you know, many of the oil fields and gas fields which we are exploring and exploiting here in the United States were prohibitively expensive under the old drilling methods, but are perfectly economical based on fracking, right? Recycling is is another way of doing it. Dematerialization is a great way of doing it. You know, if we can, if we can, if we can do more with less meaning. 20 years ago, you walked into any, any hotel room and it would have a thick copper cable running from the wall to your computer. That’s the only way that you could get on the internet. Now it’s been completely dematerialized. We can do that functionality without actually using any materials whatsoever. We can dematerialize our car fleet. For example, if we can have cars which are powered by AI, cars are 90% of the time cars are not being used. So basically, we could get rid of 90% of cars, including all the metal and plastic that goes into them, and simply have autonomous vehicles picking us up when we need it. So that’s another way of going around the problem of material use. So efficiencies, you know, we can have relative as well as absolute efficiency. So, you know, a can of Coke or water or whatever else uses much less materials than it used to in the past. But also when, when, when you look at very sophisticated economies such as the United States and the United Kingdom, what you observe is that the total, the absolute amount of resources they use every year in order to produce GDP, is actually decreased things. So there has been a certain level of decoupling between resource use and economic growth. So that’s that’s also important. So there are many different ways in which you can actually increase your resource base, but it all requires innovations. It requires new ideas that are born in human mind.
Gene Tunny 19:46
Yep, gotcha. And I mean, that requires that we have a, you know, a good education system, too. And I mean, well, that’s another that’s an issue for another, another podcast. But I was,
Marian Tupy 19:55
in case, I was, I was going into too many details. Let me put it this way. Yeah. Today’s population is 8 billion people. Half of us would be dead if it if it wasn’t for artificial synthetic fertilizer. Our ancestors, 200 years ago, used horse manure, and they used even human excrement. They would compost and do all sorts of other things in order to produce very little yield in agriculture today, what we are using is ammonia, which is essentially a compound made from natural gas. We are using natural gas in order to create artificial synthetic fertilizer, which enables our crops to grow very fast and very big and and who would have thought that you can use natural gas in order to fertilize our crops? But haber bosch discovered this process in the early 20th century, and ever since then, half of humanity has depended on this kind of fertilizer in order to feed humanity. But it was born in human mind.
Gene Tunny 20:56
Oh, exactly. And that’s, that’s one of the points that I think Ed Conway makes, in his book, material world, a substantial story of our past and future, which I’d recommend if you’re listening. And do you want to learn more about what’s been happening with our use of resources and materials, that that book’s absolutely fascinating. And, I mean, I’m sure yours will go along that. I mean, you’ve, you’ve got some great reviews already on on your book, which is terribly just on the I’d like to talk about this issue of exploration, because, yep, that’s, that’s one of the ways that we get around this, this constraint, because of it as if things do become scarcer, then the price increases, and that sends a signal that makes it economic to mine less, you know, deposits that are of that are harder to get to. It makes it economic, or it can support exploration activity. Have you crunched the numbers on to what extent is your super abundant story being driven by, you know greater discoveries. You know exploration, finding more reserves of resources. To what extent is it driven by increases in the efficiency of extraction? Or you haven’t, no okay, because
Marian Tupy 22:19
we didn’t break it down like that. And I don’t even know if anybody has done that, but, but the main point of the book is is things are getting cheaper because of human innovation.
Gene Tunny 22:32
Yeah, yeah. And so the other option is that it could be because of general productivity, the productivity more broadly, because we’re becoming wealth, more productive, wealthier,
Marian Tupy 22:44
sure, but of course, but productivity is just another word for innovation, right?
Gene Tunny 22:49
Yeah, yeah, yeah, absolutely, yep. I think it’s a valid hypothesis. Before we sort of wrap up, I just want to ask whether you think there are other constraints on growth like this is something that I’m confronted with. You know, I generally think, I think this whole degrowth argument, I’m not a fan of it. I’ve, I’ve argued against it in various places, so I’m not a supporter of it. What the degrowth advocates will argue is that we’re reaching these planetary boundaries. I mean, one, we have concerns about climate change, and that’s in their view, that’s leading to, well, there’s the increase in temperatures, there’s the concerns about heat stress and whether humans can cope with that. There’s concerns about, I mean, all of the concerns about what it means for agriculture and and also natural disasters. So there’s that, there’s also, there are concerns about ecological collapse, in some cases. To Have you thought about those issues at all. Marion, are you concerned? Do you see any limits to growth coming from from other issues, some other environmental issues?
Marian Tupy 24:00
Yes, so I try to think about it as much as I can, as time permits. But okay, so we need to distinguish between what I would call the primitive version of degrowth, which is the claim that we are going to run out of oil, or we are going to run out of pound or something like that, and then a more sophisticated version of degrowth, or the degrowth criticism, which would be something like, we are going to poison our oceans, we are going to run out of the biosphere. We are going to kill all the animals, etc, etc. Now, this is a huge subject, and I’m very happy to come on to your program in the future, but, but let’s, let’s take as many as we can within a within a reasonable time window. Let’s think about plastics in the ocean, and let’s think about pollution of the oceans. 90% 95% of all plastic in the oceans comes from eight rivers, all of them are in. Asia and in Africa. Two are in Africa. Six of them are in Asia. What does that tell us? It tells us that when a society is rich, such as Europe, you know, Australia, North America, people are so rich that they insist on living in a clean environment and being protect and protecting their environment, which is why stuff doesn’t plastic and other poisons do not emerge from our rivers into the oceans. It’s the poor countries that do that. So the answer to having clean oceans without plastic is actually economic growth and prosperity, which will allow Asia and Africa to implement the kind of environmental policies that we have in order to prevent poison from running into the oceans. Let’s look at a second subject, which could be something like the biosphere. So I’m an environmentalist as much as you are, and probably anybody else, in a sense that we like clean environment, we like animals, we like plants. We don’t want to destroy the Earth. I love nature. So now what is, what is the best way to protect the biosphere? What is the best way to ensure that there is plenty of acreage in the world where animals can thrive. Well, the best way to do it is to have hyper efficient agriculture so that we can produce more food on fewer and fewer acres of land. If 8 billion people in the world today lived on the same amount of land as our hunter gathering ancestors, we wouldn’t need one planet, we would need 10 planets, right? But because we can produce a lot of food on acre of land, and then we can produce twice as much food in 50 years, and maybe another twice as much in another 50 years, that should enable us to feed more people on less and less land, which means that we can return land back to animals. Jesse asubel from Rockefeller University once calculated that if the world’s farmer, the average world’s farmer, became as productive as the American farmer, we could return the land mass the size of India, back to nature. So it’s all about agricultural productivity, right? The more we can make our land, the better we are water. There are concerns over running out of out of fresh water. I’m not concerned because I know that this Desalination is absurdly cheap. Israel now recycles 98% of its water and it desalinates the rest. The ideal version of desalination is to combine desalination with solar or wind power. And in fact, Israel not just supplies its own water, but it actually supplies palestines and Egypt and Jordan with fresh water out of desalination, recycling. What else is there? Fresh air. Sorry, clean air. So this is something that obviously requires global action, because, you know, there are no property rights in in the atmosphere. However, I would like to point out that the air in western rich countries is now cleaner than it has been since before industrialization. So the particulate map in the air has been declining. And in fact, if you look at the Yale, the Yale index of environmental protection, and then you compare it with GDP per capita, if you combine these two statistics, what it shows you is a very strong correlation between income per capita and environmental protection. So we talked about, you know, animals and plants preserving biosphere, but by returning more land to nature, we are talking about our oceans. Now, another thing which we could talk about is overfishing. This is something that a lot of people are concerned with, and here the answer, of course, rests in aquaculture. Already, 50% of all the fish that are being consumed around the world are being grown for the specific purpose of being eaten by essentially seafood farmers. Right? These are not fish from the wild, and obviously what we want to do is to get to 100% as soon as possible. So there are all of these different ways in which we are supposed to bump against planetary, planetary boundaries, but, but when you look at again human ingenuity and the way that we’ve been able to tackle such things as, I don’t know, desalination or aquaculture, agricultural production, it. Gives you hope that we’ll be able to do this in the future. Just more of it.
Gene Tunny 30:06
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 30:41
now back to the show. That figure you gave about plastics in the ocean that was striking. 95% of the plastics in the ocean come from eight rivers in Asia and Africa. I mean that that’s that’s extraordinary. I’ll have to look that up, because that’s a I know a lot of people who’d be, who’d be fascinated by that, and I know my the producer of my podcast, Josh, has asked me about that Pacific Island garbage patch in the past, and has said I should cover it on the show. So it’s, it’s interesting to know what the source of those plastics, predominantly is. Do you remember where that where that comes from is that one of Bjorn Lomborg figures. Would you know this?
Marian Tupy 31:29
I can’t remember, and I sure as hell hope that I’m I’m 90 How about this? I’m 95% right that it’s 95% of plastics out of plausible. We can
Gene Tunny 31:40
go, it sounds plausible, because I imagine that, yeah, because when you think about it, yeah, be we, like in Brisbane here, we’ve done a lot of work cleaning up the Brisbane River, so it looks a lot better than it did 20 or 30 years ago. So, I mean, it’s, it’s plausible. I mean, I know that, yeah, a lot of the environmental, uh, problems we see that, yeah, they they see more acute in those in those emerging economies. So anyway, I’ll have a I’ll have a look for that. I agree with your, your general point. The other thing that your remarks, what had brought, what came to mind in the 2000s here, we had a thing called the Millennium drought in Australia, and there were concerns that, oh, it’s never going to rain again, or we’re going to have much lower rainfall than ever. And you know that people were linking this to climate change. And then we had, and then we had record, or near record rainfall, or whatever it was, in 20, 1011, it just kept it just rained for weeks, and all the cashflows got soaked, and there’s massive flood. So Brisbane flooded. I was caught in the flood at Toowong, and, yeah, but prior to that, we were worried about water security, and we went on a recycle we built a recycle water plant, then we built a decal plant, a desalination plant at Tugan for I don’t know whether it was a couple of billion, it was a lot of money, and we, we hardly ever use it. We use it occasionally, for brief periods. It’s, it’s, it’s not, it wasn’t really required. It just goes to show you, if you, if you make your decisions based on some imagined catastrophe in the future, you can end up making some, some really bad, really bad decisions. So that was a you
Marian Tupy 33:27
I remember distinctly, I was skiing in Whistler in Canada in 2014 and, you know, the the old dogs who’ve been skiing there for, for for decades, were absolutely certain that 2014 was the last year in which it was going to snow. Because, you know, the year before there was more snow, and the year before there was more snow, and now it seemed like there was ever less snow up there. But these things are not linear. And of course, all the predictions about, you know, snow free winters, remember those from 20 years ago, all gone broad. You know, Arctic, ice free, Arctic that never happened. So, you know, the earth is warming. Planet is changing. Climate change is not a myth. It is not a lie. It is it is really happening, but figuring out what exactly is happening the exact consequences of climate change on the planet, that is much more complicated, and we certainly have time. Look, I’m not suggesting this is not a problem. What I’m saying is that the notion that we have six years left, or when, when Prince Charles was still Prince Charles, before King Charles, he said something like, you know, we have 48 months to fix the world, or something ridiculous. The point is that. The point is that a lot of people have been burned by making predictions about how the world is going to end. And we it’s not that we have five years or 10 years. We have decades in which. Need to think about maybe burning less fossil fuels, maybe having more nuclear, maybe having fusion energy, but we have time to adjust. And, you know, the world is not running out of anything, and we just have to be, you know, we just have to apply our ingenuity to fixing our problems. We have. We have fixed tremendous problems before. Let’s remember that life expectancy around the world, until recently, was 35 years. 50% of babies before the age of 15 died due to natural causes, and famines were omnipresent. 10s of millions of people died every year due to famine. We have solved a lot of problems, and there is no reason to think that we cannot solve them in the future. We are a very special animal. We can think. We can long term plan. We have reason, we have cooperation, we have trade. So you know that there’s there’s rational grounds for rational optimism. Absolutely,
Gene Tunny 36:02
very good. And it’s about ingenuity and relying on on free markets letting you know, providing the incentives for people to to innovate and to reap the rewards of their of their innovation. So very good. Mario Toby, anything else before we wrap up? I really enjoyed this conversation, and it’s a good start to the day. I’m in Australia, and it’s just it’s gone past 630 so it’s a really good start to the day for me having this conversation. Anything else before we wrap up?
Marian Tupy 36:36
I would just say I very much enjoyed my trip to Australia. You are the lucky country. Very beautiful. A lot of resources. Lovely people. Keep it going. I understand you are going to build some nuclear power stations. Is that true?
Gene Tunny 36:49
Possibly, I’m I think, I think they’re worth exploring. I’m skeptical about whether we will ever build them here in Australia. I think there’s too much of a an environmental movement here in Australia for us to ever build nuclear power. I could be wrong about that. It’s looking like the cost of moving towards 80% or 90% renewable energy, or whatever they want it to be, that’s just going to be too high. So we’re going to have to do something else that possibly could be nuclear. But just knowing the Australian, Australian politics of people, just how prominent the Greens movement is, I think it’ll be hard to get nuclear reactors built in Australia. But having said that, I mean, they could end up being the path of least resistance, or there is no alternative, because the alternative, at the moment, looks to be hideously expensive electricity due to this rollout of renewables and that are unreliable, we’re trying to build this Snowy Hydro. I don’t know if you’ve heard about our Snowy Hydro 2.0 project that that was initially supposed to cost. I don’t know. Maybe it was 10 billion. Now it’s blown out to 20 billion or so. I’ll put the right numbers in the show notes. So it’s just keeps blowing out, because I have all sorts of issues. We we ended up with one of the tunnel boring machines stuck in the rock, okay, like this is, it’s been stuck for months, and this is just this. It’s just symbolic of just how dread, hopeless this project has been. So we’re having to do these, you know, massive engineering projects to back up all of the intermittent wind farms and solar farms. And it’s just, yeah, it’s a, it’s a, well, you never know.
Marian Tupy 38:43
You never know. You know. In Europe, 10 years ago, it looked like the greens, the Climate Lobby was all powerful. They’re losing power all over the place because, basically, energy became so expensive that Europe industrializing. People’s standards of living are decreasing because energy and electricity is so expensive, and energy goes into everything. It goes into literally, it impacts the price of price of tomatoes in the shop. So you never know. We certainly see very positive changes amongst environmentalists here in the United States, they’ve now recognized the importance of nuclear. If you want to get away from, from from fossil fuels, at least to some extent. We are never going to get away from completely from fossil fuels. That’s just not possible. There is not going to be energy transition. We are just going to add new stuff to energy. We are still burning coal and sorry, we are still burning wood. So you know that’s not going anywhere but, but we can. We can. We can certainly limit it, and I’m a huge proponent of nuclear especially if we can learn to make it cheaper. So we’ll see. But certainly, congratulations on being born in such a beautiful country, and I hope that you can keep it prosperous and happy. Yes,
Gene Tunny 39:59
yeah. Yes, I hope so too. I mean, one, one thing I should note, because it just comes up with this issue of population, just if you got another second, because I did what I did want to wrap up, but I thought there’s one thing, one point you made about population before I agree with you. Over the long term, I think for any individual country, this relates to your last your concluding what, what was going to be your concluded covid, about Australia, and I think you’re generally right. I mean, it is a prosperous country. It is the lucky country. We’re facing big challenges in the short term or over the next few years, because we’ve had a massive surge in population post covid, which is related to very lax immigration policy settings that are very favorable to overseas students. So then possibly rorting of the student visas, because it’s, you know, it’s a way you can get access to the Australian Labor Market. So I think that’s one of the issues we’ve got to grapple with. I know that’s an issue in other countries too, but that would just be my one qualification to this general optimism about, you know, having a larger population, more more ingenuity, that sort of thing. So I just wanted to make that that comment, it just occurred to me. But if you’ve got any reactions to that, please, please, let me know.
Marian Tupy 41:22
I mean, the question is, the question is, what? What is the negative effect? Is it? Is it increases prices of real estate, like increasing
Gene Tunny 41:30
real estate, just general congestion, I think, an inability of public services to keep up with the the population growth, yeah, just a general feeling that the country has, the country’s changing in a way that, yeah, think things just don’t seem to work as well, or it’s not the same country as generally, not as friendly or as Welcoming as it once was that would be, that would be the, my sort of take on it, yeah. But generally I think, yeah, it’s the housing issue, where it comes up the most, but it’s congestion in other areas too, well. I
Marian Tupy 42:12
mean, obviously I think that every country has a right to decide who comes in. You know, you know, I’m very I’m very liberal on immigration, but I do think that we need to know who is coming in. Are these people posing any kind of terrorist threat? Do they have criminal records? We just don’t know, because a lot of people come in illegally. I wish we could go back to the time from 20 years ago, when you know people would come in legally, and they would go through the process of having background checks and whatever else, and if they can contribute to the economy, then so much the better. And when it comes to housing, look, if Australia cannot solve it, I don’t know who can, because you’ve got a lot of land. One thing which puzzles me is that we have stopped building new cities, which is kind of bizarre when you think about it. People used to, yeah, cities left and right. And it seems just so difficult nowadays in the West to actually start properly, start a new city. You know, there are states in the United States where the federal government owns 90% of the land. If the federal government just gave it back to the States, and the states simply said, Go forth and conquer and build new cities. You know, it could be done. But ultimately, I don’t think that the issue here is lack of land. I don’t think there are the issue is lack of resources. I think the problem here is tends to be over regulation and governments putting putting barriers in in the way of human ingenuity and human enterprise. So, you know, there’s that’s certainly the case in the United States when it comes to housing. Yeah,
Gene Tunny 43:48
absolutely okay. We might end there. I think that was a good point to end on. Barry and Tubi from the Cato Institute. Thanks so much for all your work, for a great conversation, and I’ll put a link in the show notes to your new book, super abundance looks terrific and all the best for the future, and I hope to catch up with you sometime again soon. Thank
Marian Tupy 44:09
you very much. All the best.
Gene Tunny 44:12
Righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics, explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a writing. Thanks for listening. I hope you can join me again next week.
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Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
This episode delves into the work of Good Business Lab (GBL), co-founded by Professor Achyuta Adhvaryu. GBL focuses on innovative workplace interventions to improve worker well-being and firm productivity, and it typically evaluates these interventions using Randomized Controlled Trials (RCTs). Show host Gene Tunny and Ach discuss the effectiveness of soft skills training programs and the importance of worker voice in creating a more engaged and productive workforce. They discuss methodological issues regarding RCTs and whether the Hawthorne effect is a concern. Ach is Tata Chancellor’s Professor of Economics and Director of the 21st Century India Center at UC San Diego.
You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.
About this episode’s guest: Professor Achyuta Adhvaryu
Achyuta Adhvaryu is the Tata Chancellor’s Professor of Economics at the School of Global Policy and Strategy and is the inaugural director of the 21st Century India Center at UC San Diego. Adhvaryu’s research interests are in development economics, organizational economics and health economics, and his experience in organizational development make him well-suited to lead our new center. Prior to this role, Adhvaryu was a professor at the University of Michigan and an assistant professor at the Yale School of Public Health.
Transcript: From Academia to Impact: Transforming Workplaces w/ Achyuta Adhvaryu, Good Business Lab – EP251
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Achyuta Adhvaryu 00:03
You know, Morton Salt did this purely through competitive forces. They wanted to stay in business again. They said, Hey, we better get on board with this thing. And it turns out, you know, they were able to solve a huge public health issue.
Gene Tunny 00:22
Welcome, to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This episode features a conversation with Professor Arch advaio from University of California San Diego arch is the co founder of good business lab, a non profit dedicated to improving worker welfare and firm productivity through innovative interventions. According to the lab’s website, worker well being is good business. We believe that building the business case to support better conditions for workers is the most sustainable way to transform labor markets and enable everyone to reach their economic potential and live a dignified life. Hutch shares his fascinating journey from his early work in East Africa studying healthcare delivery to his current focus on leveraging the private sector to drive positive change. He discusses the lab’s groundbreaking findings, such as the significant productivity gains from soft skills training for garment workers and the importance of empowering workers through improving worker voice, the ability of workers to communicate issues and concerns to management. This conversation offers valuable insights at an intersection of academic research, business practices and economic development. Join us as we explore how arch and his team are bridging the gap between theory and practice to create meaningful impact. One of the highlights for me in this conversation was how arch explained how his interest in economic development was stimulated by his work in East Africa, and that came about because he followed his girlfriend, who later became his wife, to the region. It’s a story that appeals to the romantic in all of us. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes, as always, I’d be interested in your thoughts on this episode or others, and any ideas you have for future guests or how I can improve the show. My contact details are in the show notes. Okay, without further ado, let’s dive into the episode. I hope you enjoy it. Arch Welcome to the program.
Achyuta Adhvaryu 03:00
Nice to be here. Thanks for having me on
Gene Tunny 03:03
terrific I’m keen to learn about all the good work that you’re doing with good business lab. Before that, I’m interested in what’s your story in terms of getting to setting up the good business lab with your with your co founders, you did a PhD in Economics from Yale. Could you tell us a bit about what you studied and what led you to this work you’re doing with the good business lab, please?
Achyuta Adhvaryu 03:32
Yeah, sure, that’d be great. So I’m an economist. You know, I have never had a real job in my life. I think been, you know, college student, I went straight to grad school. They went straight to faculty jobs and and, you know, part of that pathway has always been, you know, yearning on my end to not only have impact in the academic sphere and generating knowledge and, you know, producing things that are consumed by the academic, you know, world, but also, kind of having some of my work influence policy making, influence or decisions on the ground and influence people’s lives. That was always the goal, getting into the PhD. And I realized pretty early on, when I was in graduate school and as a junior faculty as an economist, that while we often research things that are, you know, very adjacent to the real world, the sort of esoteric nature of academia and the kind of, you know, way that the knowledge production industry is structured, we’re almost encouraged not to be, you know, get our hands too dirty in the real world. Yeah. So I’ve had. You know, mentors and professors tell me, you know, don’t bother with all this policy stuff. You know, I think if your stuff gets picked up by the policy making world, that’s great, but if not, you know, that’s not what you’re here to do. We’re very strictly sort of trying to push out the knowledge frontier. And I sort of didn’t agree with that notion. And I think actually, I’m, you know, I’m not the only one who felt this way. And one kind of academic generation before me, you know, folks like Esther Duflo and Abhijit Banerjee and Michael Kramer and several others were were kind of forging this path of having one foot in academia and doing really rigorous work that’s informed by the kind of cutting edge, you know, of academic work, but also having a foot in the policy world and dedicating a lot of time and resources towards advancing, you know, policy goals. And in this case, I came to economics with a with a deep desire to impact the lives of of low income populations around the world, much like I think Esther and Abhijit and others. And I think that that journey began actually in East Africa, and a lot of my early work was around healthcare delivery to poor populations. Like, how do you sort of make that more efficient and more universally accessible, especially in kind of remote rural areas where there’s not very much healthcare access. So I was working in that space in Tanzania and Kenya and Uganda and a few other places for the first part of my career. But I think I always acknowledged that at the core of a lot of the stuff that we do as economists, there is a private sector role. So it’s not just about government delivery of policy, of policy, you know, and resources to the poor, while that is a big part of, you know, the safety net and always will be, I felt that there was an under emphasis on understanding the role of the private sector. How could the private sector be involved in delivering, you know, welfare enhancing interventions to poor populations and make their lives better. There are some great examples historically of how this has, you know, been possible, but there wasn’t kind of a clear business rationale for a lot of this, and, you know, lots of things I saw early on in the healthcare space around, you know, trying to distribute medicines to rural, remote populations through these agents who were then kind of paid, you know, and so that you might consider that a private sector framework, a lot of that kind of fell short of what I was really hoping for in academia and in the policy world, which was, can you actually generate a business case for intervening amongst poor populations? And I think that the sort of easiest way you might be able to do that is within large firms that are very labor intensive. So, you know, take your average, you know, manufacturing sector, firm, big place, employees, 1000s of people, all working back jobs, most of them being, you know, low income individuals. Maybe there’s a vested interest there for that business to take care of its workers, and maybe that can actually generate, you know, improvements in their lives that are compatible with the business, uh, functioning as well. So that’s the sort of hypothesis that I felt was under explored, both in academia and kind of in the real world, where you’re seeing more and more sort of conflict between, you know, workers and management and kind of dividing up this fixed pie, or fighting over wages, fighting over benefits and training and all that kind of stuff. You’re seeing strikes all over the world related to this that we’re sort of missing the thread a little bit on maybe there’s an area of common ground where we can all function, and what does that area look like? What are the kinds of interventions that might work? What are the kinds of interventions that have gained traction but don’t actually work? And those are the kinds of questions that I sort of becoming interested in from an academic perspective. And then to your question about good business lab, we realized very quickly, my co founders and I, who started working in this space, in a large garment firm in India, that just publishing academic work was. Just not going to do it. It wasn’t enough to actually move the needle and change the minds and the actions of decision makers who could actually generate impact. So, you know, in addition, the fact that nobody, nobody reads the work that we do, it makes up for a sort of select, you know, group of academic elite, or something like that. It’s also the case that it’s often hard to translate what we’re doing in academia and the questions we’re asking into real world, practical knowledge that can be applied, that can be used to change a policy in a firm, etc. So that’s why we set up Good Business Lab, along with another huja. And we thought, hey, you know, we’re generating some interesting insights here, but they’re going to sort of echo in the in the ether, so to speak, if we don’t really kind of devote serious resources and time and attention towards actually generating some change in people’s thinking. And so that’s sort of how we came up with the concept for the for the NGO, and it’s just grown from
Gene Tunny 11:12
there, right? Okay, geez, a lot to talk about there arch That’s fascinating. A few things I’d like to follow up on, so you ended up working in East Africa. Was that part of a research project? Was that, after you did your PhD, how did you, how did you end up in East Africa?
Achyuta Adhvaryu 11:30
Yeah, that was actually during my PhD, after, after my first year in the it was, to be honest, a little random, I knew I wanted to work in the sort of development economic space, basically the areas of poverty alleviation. I was interested. I was drawn to health care access. And I was, I was dating my wife at the time, who was just starting out, or she was doing her senior thesis in college, and she was going to do it in Tanzania. And I said, Hey, I like this girl. I’m gonna go Tanzania too. So I started blindly emailing my professors and saying, hey, I want to go to Tanzania and look at something related to health and development. What do you think? And I, you know, was fortunate enough, through a chain of emails to be connected to the Centers for Disease Control and Prevention The CDC mission in Tanzania. And the head of that mission was a extremely nice man who kind of said, Hey, sure, why don’t you come over and help us with the survey we’re doing, and you know, we’ll see where it goes from there. So I said, Great, this sounds like a wonderful summer, and I get to be, you know, with this girl that I was, you know, head over heels for. So I was excited to do it. That’s the really kind of serendipitous start to the My Work in East Africa. But, you know, I grew to love it. And I think there’s, of course, so many really interesting and meaningful questions to tackle in that space around health and development, I worked in the delivery of a new malaria therapy, because malaria is obviously a huge problem in parts of Sub Saharan Africa, you know, one of the leading killers of kids Around the world. And you know, it’s entirely treatable with therapies that you know you just have to get access to them. So it’s one of these problems of last mile delivery that are both incredibly important, literally life and death questions, and also really interesting from the kind of program delivery and academic perspective of, how do you kind of ensure that all potential beneficiaries receive access? Yeah,
Gene Tunny 13:49
and what did you conclude in that project into because you mentioned before that there are issues with efficiency and accessibility. How did That’s right, yeah, What? What? What type of findings did you end up making?
Achyuta Adhvaryu 14:01
I think there are two broad learnings, one of which was kind of specific to the work that I was doing. And I was around how people learned about new therapy and choose to try it out. Because, you know, the easiest thing to do is kind of default to what you already know. And so if your kid is sick, you say, Okay, I’m gonna go to the drugstore and pick up Chloroquine, or, you know, one of these therapies that has existed for 50 years, but it’s not very anymore. But then you gotta, you know, in the case where that doesn’t work, you might take a gamble and say, hey, the, you know, government clinics got this new artemisinin based combination therapy. Why don’t I give this a shot and see how this works for my child? But kind of taking that leap of faith is costly, because government clinics are very far away from these remote, rural populations. So you know, this meant probably losing out on a couple days of work. And, you know. Walking all the way to the clinic and all that kind of stuff. So my research really was about sort of how people learn, as they kind of experiment with these new therapies, how you might learn about the effectiveness of new therapy, and in a environment where misdiagnosis of malaria was extremely prevalent. So you know, often you just say, I think you have a fever, you should go have some malaria medication. But, you know, half the time it’s not malaria. And so, you know, if you actually had good diagnosis, then you’d get much more effective adoption of treatment, which is the kind of, kind of 10,000 foot takeaway from my dissertation work. But the other thing it taught me was, again, the role that the private sector plays, inevitably, because in all of these villages, there was at least one, what they called Duka, which is like a little shop that sold medicines and is usually staffed by someone who, literally, you know, has no medical experience, no training, etc. It’s just a person who, you know, could get their hands on some meds. And maybe, you know, in a lucky case, it was a, it was a nurse or something, but usually it was somebody who just, you know, my uncle, you know, can get me these medicines. And so I’m going to sell them in the village. And they have no idea about how to diagnose kids with these kind of life threatening diseases, etc, so, you know, but they’re nevertheless that that’s the sort of like first line of defense against malaria and other important diseases, right? Because everybody’s using these guys. So how do you guys started thinking, you know, we can’t just focus on the government clinics, because those are useful, but they’re really far away. Nobody from until they’re really forced to. We really should be focusing a lot on, how do we strengthen the capacity of these guys, who are these shopkeepers and owners? Maybe make them a little bit more in tune with what works and what does and what are the newest therapies, maybe connect them to supply chains, et cetera. So that’s when the wheels started turning. The private sector being an important
Gene Tunny 17:04
player, right? Okay, okay, that’s, that’s all fascinating. And you mentioned, historically, there have been some good examples of private sector doing, you know, positive things for I’m trying to remember what, what exactly you you were saying, but I guess you, I imagine, are you talking about things, organizations like friendly societies. What type of organizations are you? Do you have in mind? Well, you
Achyuta Adhvaryu 17:28
can just, sometimes the the private sector, just doing its thing, just, you know, out there to make a profit, still, kind of tax society. So one great example that I love giving. I’ve done some work on this in an academic paper, is the story of Morton salts, the, you know, big salt company in the US. And, you know, I’m sure you’ve seen that you can, when you go to the grocery store, you can buy salt that’s iodized, which has iodine added and salt as and, you know, we’re all instructed to to buy the iodized kind because it, you know, prevents goiter and, you know, cognitive deficiency. It’s particularly valuable as micronutrient for pregnant moms, etc. So iodine is kind of a really critical to, you know, all kinds of cognitive and brain development. Turns out that most countries in the world, including the US, before the 1920s had just rampant iodine deficiency disorder and depended on where you were. So if you’re near the coast and or, you know, these iodine kind of reserves around the country, then you were okay, because a lot of the sort of plants you ate and the meat that you ate had iodine in there. But if you didn’t, for example, you didn’t eat fish, which is a great source of iodine, or you lived inland or lived in a mountainous region, Switzerland was particularly bad with iodine deficiency then, then you were just not getting enough. And so this actually prompted the government to work with, you know, a bunch of physicians and researchers who had kind of discovered this link between iodine deficiency and cognitive disorder to try to figure out, how are we going to get iodine into the population? And they concluded that one easy way was to add it to salt. It was a very simple process that you could fortify the salt with iodine. And Morton Salt was the largest salt distributor in the country at that time. And you know, the the there’s a doctor at the University of Michigan who actually convinced some local producers in Michigan to say, hey, you know, you guys have a big problem with iodine deficiency. I think it might be a competitive edge for you if you’re competing with this big name Wharton salt, if you just, you know, put iodine in your salt, and you kind of advertise the benefits of that. And. They ended up, you know, being convinced. And they went ahead and did that. And so Morton Salt had to compete with this, you know, new newfangled salt that had iodine. And so they said, Well, you know what, instead of just changing what we’re doing in Michigan, why don’t we offer I iodized salt across the country, and we’ll make it exactly the same price. It was 10 cents at the time for a canister of salt. So we, they said, you know, we’ll have the regular canister and we’ll have the iodine fortified canister, and we’ll, you know, they’re going to be on the shelf, and they’re both going to be 10 cents, and people can do what they want. And of course, it turned out, you know, through good, good messaging and marketing, they made people aware that this was actually a problem, and people chose to go with the iodized salt. It’s so cheap to fortify iodized salt that this sort of really made Morton Salt corner the market, and within a matter of basically 10 years, 15 years, iodine deficiency disorder was erased in the US, except for very remote communities. So that was just like a really wonderful story. You know, Morton Salt did this purely through competitive forces. They wanted to stay in business again. They said, Hey, we better get on board with this thing. And it turns out, you know, they were able to solve a huge public health issue that had massive implications for cognitive ability, and, you know, rates of goiter medical condition in the US.
Gene Tunny 21:29
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Gene Tunny 22:04
Now. Back to the show, arch. Can I ask about now Good Business Lab, so we’re up to, would be good to talk about that? So you mentioned you were studying development economics, and there was a view among some academics, or don’t get your hands dirty, but you saw that there are a lot of good insights from development economics that could be applied in the real world or some of the research that was occurring. You mentioned colleagues of yours, the flow and and Banerjee, is it? Yep, and you’ve got your your good business lab, you’ve set up this NGO or this nonprofit, and you’re looking at your, you mentioned, large firms, labor intensive, and potentially, there’s some interventions that can be undertaken to to get better outcomes. Can you tell us about some of the the work you’ve been doing with good business lab and how you’re trying to get those better outcomes in business, please.
Achyuta Adhvaryu 23:03
Yeah, sure. So that’s, you know, it’s a, it’s a big blank slate when we started out in terms of what might work, right? So I think there’s lots out there that people, you know, with reasonable amount of common sense might think, okay, if your workers are really poor and unhealthy, for example, then improving their health a little bit in the workplace might actually generate some, some gains, you know, for them, and also kind of be useful for the firm. They might they might be more productive at that work. They might be able to do more. They might be absent less. They might stick around longer. Same thing with skills, you know, it’s another big bucket. Lots of firms provide skills to workers, and the idea is that, you know, well, if you, if you make the worker more productive by providing the skills on the job, then they might generate more productivity for you, and also kind of stick around longer, etc, but a lot of these theories were kind of untested, right? So there was a lot of kind of going with your gut here in terms of what firms were doing and also what academics were advocating for, right? And the NGO sector was advocating for so we came into the space and said, Look, some of these things may actually work, and they might actually be great. Some of them may not, and might actually generate, you know, either nothing for workers or may not actually feed back into any kind of productivity or profit for the firm, in which case, let’s not spend resources on that stuff. So can we actually generate a menu of things that firms can look at and say, I want to invest in my workers in a way that benefits them, and also then in some way? Comes back to me some and affects my bottom line that we can generate. What does it look like? What are the types of interventions? So we went in on on some of the most obvious ones first. So the first kind of set of studies we did were around skilling inside the firm, and in particular, we focused on soft skills, which is actually, you know, a little counterintuitive for most people, when you’re thinking about a blue collar workforce, right? Like imagine a factory worker on a production line. What good is, you know, leadership and communication and teamwork skills and conscientiousness and all this kind of stuff that you usually think about when you are thinking about soft skills. What good is it for that worker? Right? We usually think that those are skills that white collar workers might use, that you know, a good CEO should have, etc. Turns out that, according to our research, those skills actually end up being incredibly important, even for frontline workers. And start, you know, digging a little past the surface, you sort of start to understand why. It’s because the production line is really just a large team, right? And you’ve got 50 other team members on that line, or 70 other team members. You’ve got a boss you’re communicating with. There’s lots of stuff that you need to do on that line that has nothing to do with the technical skills, like, you know, putting a car part on a car, or, you know, stitching together the sleeves of a T shirt or whatever, right? All this stuff that you know you’re doing on the on the factory floor is also related to how you know, skilled you are at communicating with your team members, right? So, if there’s a, if there’s a, you know, a block in, in the line that’s kind of slowing you down. You have to look back and say, Hey, can I help what’s the problem? How do we, you know, how do we speed things up? If there’s, you know, a problem with your machine, you have to raise your hand and talk to your boss and say, Hey, there’s, there’s something that’s stuck here. I need some help fixing this. If I’m not feeling well, I might need to raise my hand and say I need some help today. Or if I have a friend who’s not feeling well, I might tell my boss, maybe we should help out. You know my friend over there, because, you know, Gene’s not feeling well today, and he’s he’s likely to be unproductive. All of those things are soft skills. And you know that seems easy enough to do, you know if, if you went to good schools, had a good education, you know, grew up in a good community that sort of fostered those kinds of communication and teamwork and leadership skills and patience, etc, then those things are sort of ingrained in you already, but for people from low income backgrounds, that’s often not the case, right? That you know, they went to a school that didn’t teach any of that they might have. You know, not grown up in a family that encourages people to speak up and say what they’re feeling. So you know, for a variety of reasons, they’re coming into the workplace with low levels of these skills, and so just improving those fundamental skills and connecting them to the kinds of activities that that workers do in the workplace generates both kind of increases in the skills that those people have, but also feeds back into productivity. So in one program we evaluated, which is called the PACE program, which is essentially the flagship CSR corporate sustainability program for gap, the clothing company, which was kind of trying to, you know, proliferate across its supplier network all across the world, that program, which is a soft skills training program for female garment workers, generated an 18% improvement in productivity and a net rate of return because of that huge increase In productivity of about 250% after 18 months. So it was a huge, huge, you know, hugely beneficial program, both to workers who really, really thrived after taking the program and to management, because productivity went up substantially. So that was our first kind of foray into the soft skills space, and since then, we’ve run several other trials that have basically confirmed the importance of soft skills in the workplace. So we did this at a higher up level, which I can talk about more if you’d like, but that was a managerial training program we evaluated, which we developed ourselves based. On firsthand, on managers in these garment firms that we’re working in, and that also generated six or 7% increases in productivity. And given that it wasn’t very expensive, a program to implement, the rate of return was was astronomical. So the program, you know, returns about 50 or 60x in the two year period. Kind of following programs implementation to the firm, which is kind of about as good a rate of return as you’ll ever get on any intervention. So I think, through a variety of work, you know, I’m convinced, in general, that soft skills at all levels are incredibly important for workers. The other kind of bin that we’ve been working for quite some time in is around worker voice. And so this is the basic idea workers when they don’t feel heard, when they feel like I have a grievance or a concern, and I keep telling my boss about it, but he’s not listening. He’s not changing anything. Or I can’t even speak up to tell my boss about it because I’m fearing repercussions, etc. They feel disempowered, and at the best, you know, they’ll quit and, you know, move on to another firm. But at worst, you know, we see some of the worst examples of this playing out in the strikes and protests sometimes that turn violent all over the world, where workers don’t feel heard enough, and that feeling kind of just boils over and results in a lot of strife. So we kind of have been interested in this space for a long time, especially in environments where you know the union for workers is really supposed to be the megaphone, right for concern, for airing out your grievances for negotiating, you know, with with management on important things like wages and benefits. But in a lot of parts of the world, unions either don’t exist or are extremely weak. You know, they have very low membership for a variety of reasons. You know regulation, you know the court cases against them, you know the sabotage on the part of firms. You know there’s, there’s lots of, lots of, you know, bad stories about this, but basically in a lot of places, you know, you rarely see workers as part of a union. This is true in India, where I work a lot. So, you know, we started thinking about it. You know, in short of that kind of best case scenario of having a union rep that can really advocate for you. How do you kind of air out grievances in a way that kind of results in something changing about your situation. And so we did a series of trials, basically to enhance worker voice through technology. And you know, this could be as simple as just asking you how you’re feeling through a satisfaction survey, or, you know, custom a worker pulse sort of check, or it could be sort of more involved, or, you know, use more technology. For example, there are a lot of apps out there now that that help workers, you know, anonymously convey their messages to HR. So we basically tested all the above, and through a series of trials, we concluded that worker voice is incredibly important. It actually generates a lot of turnover amongst workers when you don’t have appropriate voice for your concerns, and when you provide technology or an intervention that enables people to air out their concerns, if they have them, they leave at lesser rates. They’re less likely to be absent. And in the best case scenarios, especially when you get HR really into it and incentivized to do a good job with these complaints, you can actually increase productivity as well. So you know that work has kind of taught me broadly that worker voices matters a lot, and simple interventions that encourage the voice of workers and encourage HR to respond appropriately in a timely manner can make a big difference for workers and also for the bottom line. Rod,
Gene Tunny 34:55
okay, that’s fascinating. I’ve got a couple of few follow up questions. It’s first on that worker voice one. So is it the fact that you mentioned there’s improved productivity? Is it? Do you know what the mechanism is? Is it the fact that HR resolves whatever dispute there was, or is it just the fact that the worker feels better, they’re less likely to slack off, or that, or they’ll work a lot harder, like, because you’ve got some choice into the level of work effort you put in any job, okay,
Achyuta Adhvaryu 35:28
yeah, yeah. So I think it’s a combination of those. So, you know, part of, part of the, the mechanism here is that I’m kind of more likely to reciprocate, you know, the effort that I’m you know, in terms of the sort of effort that I perceive is given to me, right? So, yeah, if I’m over here being like, Hey guys, my supervisor is, like, really yelling at me. He’s not behaving nicely. It’s not that I’ve done anything wrong, and he treats me really badly every day when I come to work and I keep telling HR this, and they don’t do anything. Ultimately, I’m, you know, kind of convinced, like nobody’s paying attention, or if they are, they just don’t care. And that’s potentially going to make me also do the same thing, like, Hey, I’m not going to, you know, put out for like, a, you know, somebody who doesn’t care, care about me, and I’m not going to sort of break my back over, over, you know, creating, you know, more production for these folks who are just not, you know, listening. And I think that that’s what generates absenteeism and turnover and that kind of feeling of not being valued. But there’s also kind of a instrumental feature of voice that I think resembles the Kaizen system, if you’ve heard of that in Toyota, sort of famous management system that Toyota uses to be so efficient in their workplaces. That’s something that you that’s a central tenet of the Kaizen system, is constant feedback and revision of processes. So there’s a constant, you know, we have an open channel from workers to say, do you guys are the ones on the ground. Sometimes we’re not gonna be able to see what the problems are and how they arise and all that. You know, you have a new model of a car in there, you’re gonna have to figure out, you know, how to attach all the parts together. And sometimes they don’t go together exactly how they should, and we have to modify things. The workers are the ones who are gonna be kind of coming up with those ideas first, and if they feed those up, you know, to management, then you can kind of change that process and become more efficient. So having that open channel, in addition to sort of just, you know, allowing workers to air out their grievances and have them be addressed, is also a method of communication within the hierarchy that allows workers to suggest things that might be beneficial or useful, and for those things to then filter up and change processes change the way that production is
Gene Tunny 38:09
done. Yeah. Okay, I’d like to ask about the you mentioned gap clothing company before the female garment workers that had a 18% improvement in productivity. PACE program, right? Yeah, PACE program, right. How do you measure this? How do you set up the like, how do you set up the study? Is it a randomized control trial? Or can you tell us a bit about the methodology please?
Achyuta Adhvaryu 38:35
Yeah, sure. So. I mean, when possible, we use the sort of gold standard for impact measurement, which is a randomized control trial. And, you know, we’re used to this in the post covid world, where we all hearing about the trials that were done on the various covid vaccines and all that, but they’re, you know, it’s pretty simple in the sort of medical setting you usually have, you know, a treatment group that’s randomly selected from a population. And given the, you know, the treatment, or the vaccine or whatever it is, we’re trying to test the impact up, and then we test that against the control group who’s randomly selected and receives the placebo. You know, in most medical cases, or, you know, something similar, that that that might generate placebo effects, but doesn’t actually like convey the the medication or the or the or the vaccine. So same thing happens when you do trials in social science research. You essentially have, you know, a treatment group who gets an intervention and a randomly chosen control group who doesn’t. And depending on the type of intervention it is, you know, you might get a placebo or not have placebo. You might have a blinded trial or not. It also depends on the setting. In our settings, you know. Being these kind of large workplace environments, we often use a method of randomization that essentially amounts to a lottery, because we’re introducing these new programs, these new benefits, and we want to test their effects. And so we often kind of say, hey, we come into these factory settings, and say we’re trying, trying this new program out. If it works, then, you know, there’s a possibility that everybody will get it. But right now, there’s not enough resources to give this, you know, intervention to everybody, so we’re going to try it out on a subset of the folks who are interested. And just to be fair, we’re going to do this totally randomly through a lottery, and so we have everybody sign up to see if they’re interested. When the people that sign up, we run a lottery, and we pick out people will be part of the treatment group, and the, you know, remainder will serve as part of the control. So that’s the sort of basic methodology we use. And it ends up, you know, being quite palatable in a lot of workplace environments, because think a lot of people buy into the idea that there’s something fair about random allocation, right, that, you know, there’s nothing that’s making, you know, you more likely to get it than I am, and that sort of thing. We’re just, there’s a limited resource, and we’re, you know, allocating it in the sort of most fair way possible that allows us to really measure impacts by controlling by tracking the outcomes of the treatment and the control groups over time, and we can figure out what sorts of impacts the program had on workplace, things like productivity and retention and things like that, as as well as you know, survey outcomes like you know or or outcomes that are relevant to workers, like their health or, you know, mental well being or satisfaction. So that’s the sort of methodology that we use. And, you know, in terms of in terms of measurement of productivity, that I think, is actually a really critical innovation that that I’m proud to say we spend a lot of time on, because we work, we tend to specifically, kind of like, focus on industries where we have labor intensive, you know, production, but, but also we can, in Some way, measure productivity really well, you know? So that sometimes is pretty easy because the firm’s already measuring it like, you know, we work a lot with the retail industry, and there’s really good measures of the items that come through a cash register. So know who’s standing at that cash register, right? Who’s working there, you can track their productivity really, really well. And sometimes it’s a little harder, like, you know, when you’re working on a production line, often the firm doesn’t really care what each particular worker is doing. They just care what the whole line is doing, right? How many T shirts came off this line? How many cars came off this line today, that sort of thing. So there is a little harder and we have to go in and do our own measurements. So we’ve installed all kinds of fancy devices to do that, including tablets and push buttons and, you know, RFIDs on and tags and all kinds of stuff. But we, you know, you know, with the end goal being, what firms really care about is productivity. So if we’re measuring productivity, we’re missing out on a big part of the story. And so that’s what we’ve devoted a lot of, you know, blood, sweat and tears to in our research. Yeah,
Gene Tunny 43:33
okay, that’s it all. Sounds great. Just wondering. Have you given any thought to this? There’s this concept of the Hawthorne effect, that people change their behavior in response to being monitored or taking part in that in a program, and that’s why, you know, it’s good to have some sort of, you know, might be good to have some sort of placebo involved, but in social science research that could be very difficult to do, how do you think about the Hawthorne effect, and how Does it affect your interpretation of your results? Is it something you’re concerned about at all?
Achyuta Adhvaryu 44:04
Yeah, that’s a great question, and we’re definitely concerned about it in most of the trials we do, and something that our academic reviewers are often concerned about when we when we are publishing the work and having it reviewed in academic journal. Because, actually, it turns out, you know, that the Hawthorne effect itself was in a factory, I think, in Hawthorne, Ohio, or something like that, right? Like it was, it was a, is a factory, you know, here in the US, where those original trials were done, and it was actually related to, like, light on the factory floors and things like that, but, but, you know, it’s a very important concept, and I think the you know, short answer is, for some outcomes, you can actually, you. You know, test for Hawthorne effects in a reasonable way. So, for example, if you’ve got a treatment group and a control group, and you know, they’re selected into this experiment, and we, you know, we ran this sign up first, and then we ran a lottery, and we are surveying everybody, you might think that even the control group is kind of changing their behavior, right? Because they’re being monitored, they’re being asked questions, etc. But we usually have that’s usually a sort of a minority of the participants of the workers in any particular factory that we’re working in, right? So doing a trial, it might be several 100 workers in the trial, not the like three or 4000 that are in the factory. So there’s lots of other workers in the factory who we are also passively seeing the outcomes for for certain things like retention, absenteeism, productivity, you know, salary, all these kind of kind of workplace stuff. And so, you know, we can actually look at them and compare them to the treatment group and the control group. To see, are our treatment control groups looking very, very different once, once we start the experiment, start measuring them. The answer, you know, across most of our trials for those kinds of set of outcomes is no, there’s, there’s really no difference in how, in the behavior of, you know, people who are not in the trial versus people who are in the trial, but in the control group or treatment group. So you know, so I think that on those outcomes, sorry, the control group, the treatment group, we hopefully see an effect over time. So those kinds of outcomes, we don’t see big evidence of Hawthorne effects, certain outcomes we can’t really test. Like, for example, if we, if we surveyed everybody in the treatment group and control group, then that might change their behavior. But we’re not surveying people outside of the two groups. So, you know, can’t really tell whether, whether that’s going to sort of like, affect things. Then sometimes there are these, like questions that you you know, survey methodology, questions that that that sort of reveal that some people, some respondents, are actually more likely to be swayed by being observed. And if you can measure that then you can look for whether the treatment effects were bigger or smaller in that group. And so, so we do that sometimes too.
Gene Tunny 47:29
Oh, good. Okay, I have to look at some of your your your papers. That sounds yeah, there’s all of these, all of these tricky methodological issues. I’m sure you’d have clever reviewers, peer reviewers, asking about a couple more questions just before we wrap up. Because this is fascinating. Oh, actually, might be three more questions. What’s the level of replication of these type of findings? Do you see other researchers replicating findings like this? Yeah,
Achyuta Adhvaryu 47:57
yeah, absolutely. So for some of the work that we’ve done, you know, the two examples I’ve mentioned, there’s been really great work that’s come out of the World Bank that followed up on our study and tried to, you know, Institute similar programs around soft skills in, for example, in factories in East Africa, because East Africa has these big manufacturing hubs as well. And similarly, actually, there’s been some work kind of in parallel to ours that looked at soft skills interventions in I believe it was German firms, German retail firms, if I’m not mistaken, and they’re also working with frontline workers. They also found, you know, pretty substantial impacts of soft skills training. There’s another really interesting trial in Togo that a bunch of World Bank researchers did on something called personal initiative training, which essentially involves a lot of soft skills. Then this was for sort of micro enterprise owners. So basically, people who are, like, selling, you know, stuff on in their carts or on the street, or, you know, in these very, very small businesses, I just usually have, you know, the owners, the the only employee, and there too, this kind of soft skills training resulted in huge gains in profit for those micro enterprises. In fact, that trial ran a horse race between soft skills training and the World Bank’s flagship business training program, and that then and beat the pants off the business training program. So that was really interesting trial, too. So in general, I think soft skills, we have really seen a huge growth in in trials and evidence on this that really complements the stuff, most of which was in the US, you know, like Jim Heckman and folks have been thinking about this for a long time in the US. Labor. Market, but hadn’t, kind of made it outside of the US. And then same thing for worker voice, tons of research has emerged right around the same time that we’ve been writing ours trials as well as kind of observational stuff in very varied contexts. There’s a great trial in Chinese auto firms that that looks at improving worker voice and finds big impacts on productivity and retention there. And then there’s a, there’s a great study on improvements in worker voice from kind of white collar firms in Denmark, and that also finds it back. So, you know, I would say in some Scandinavian country, I can’t remember, but, you know, you find very kind of ubiquitous impacts of voice as well. So some of these things I find, you know, it’s nice to see that sometimes, you know, if you do one trial, that’s sort of like it gives you sort of one data point. But then, you know, is that echoed around the world. And can you really say something more general about this? And I think that’s at least in these two domains, we’re seeing very similar findings emerging all around the world.
Gene Tunny 51:13
Yeah, I think I’ve seen that study. Yeah, maybe I can’t remember the country. It may have been Denmark, but yeah, I’m pretty sure I talked about that on a previous podcast episode to dig that out that that’s good. Yeah, yeah. So that’s that’s great. And the final question is, how do you see this as part of the whole convergence, or whole economic development catch up story? Is this a big part of it? How does it compare with other other factors, you know, technological transfer, that sort of thing, how big a part of it is?
Achyuta Adhvaryu 51:50
It was to say two things on that front. I mean, first, I actually think that, you know, a lot of the things we do are, I think, relevant, not only for, you know, workers in low income country contexts, but also low income workers, or workers that are sort of resource poor in in even in high income context. So like, you know, your average and we’ve been starting this work across, across these various contexts, Good Business Lab has an office in Colombia that has been doing a lot of work with firms across Latin America and the Caribbean, and we’re finding exactly the same issues, even though it’s a very different context, generally higher income levels than India and South Asia and East Africa. So, you know, I think you see these issues cropping up with sort of frontline workforces all over the world in terms of convergence. It’s a great question, and I don’t have a numerical answer for you, but I think my intuition is that it does play, you know, a substantial role in some of these interventions kind of do play a substantial role in the kind of, at least, when you’re thinking about productivity differences that we see across countries. Because, you know, there’s some really great work that you know, Shay and kleenow and Chad Severson and other folks have done the macro setting, looking at productivity across countries and finding these astonishing numbers like, you know, the US is something like, you know, 10 times as productive as the worker in India, okay? And even if you control for the kinds of technology that people use, and the industry and a bunch of other things, that even that residual productivity difference is like 4x the average one in India is four times less productive than in the US. And that gap is even bigger if you look at Sub Saharan Africa. So you know, then the real, sort of motivating question behind a lot of my work is what the heck is going on there? That’s crazy, right? That that, you know, even if you take away all these kind of, you know, industry specific, technology specific, capital specific differences, you still get this really low productivity. And my answer to this has been to look at the kinds of inputs that workers are getting, and managerial and organizational inputs that the firm is getting. So on both those fronts, I think that there’s kind of a dearth of for example, like the average worker in the US is going to have slightly more soft skills at baseline than the average worker in India, just because the educational system, the average manager in the US is going to have more managerial skill in the than the average manager in India. So, you know, those kinds of differences, I think, do play a big role in that convergence. If you’ve seen the work by Nick bloom and John Van Reenen. Look a lot of cross country productivity differences, and can attribute a substantial portion of them, you know, I don’t want to quote a number without looking it up, but, you know, it’s a sizable fraction can be attributed to managerial quality differences. So, and I see that as a form of skill as well for workers. So I think, you know, without getting too specific, I do think that this has to play a role. And the more we can, kind of, I think our point is that, in our work, is that sometimes you can, you know, a lot of people think, Well, look, there’s a fixed pie here. The more we give to workers that’s going to make them better off, but it’s going to leave less profit for us, right? And I don’t think that’s necessarily the case. And we’re trying to find counter examples to that intuition such that that common ground can be large enough that firms can feel comfortable living in it.
Gene Tunny 55:57
Yeah, that’s terrific. It’s good work. I’ll put a link in the show notes to Good Business Lab. Is there anything else I should link to? Any anywhere else we can find what you’re up to?
Achyuta Adhvaryu 56:10
Oh sure. Well, if you if you just link to india.ucsd.edu, it’ll take you to the other hat that I wear is that I direct, the 21st century India Center at UC San Diego, which is kind of a policy center related to economics, political science and science and technology policy on India and US India relations. So, you know, we deal with a lot of the same ideas we’ve been kind of talking about in this podcast. But broader than that, there’s lots of fantastic faculty at UC San Diego. It’s really sort of a one of a kind place when it comes to, you know, economics in India. And you can find out much more at that website, but encourage folks to to go check it out, in addition to GBL work.
Gene Tunny 57:02
Oh, terrific. Okay, I’ll have to check that out. Might have to chat sometime in the future about that work. But actually, has been terrific. I really enjoyed this conversation. Yeah, I think it’s, it’s, it’s great that you’re, you’re seeing these positive results and from programs such as worker voice and the the also the soft skills, I think, yeah, that that makes sense intuitively to me. And yeah, I’ll, I’ll make sure that I keep up to date with with what you’re up to. And yeah,
Achyuta Adhvaryu 57:36
that sounds great. Yeah, I appreciate being on and, you know, I will say I was unable, probably did not do justice to the to the breadth of the menu that we’ve been able to create. So I would check out the GBL website if you’d like you know more information, or if you’re interested in getting, you know, involved in what we’re doing. So thanks a lot for highlighting that.
Gene Tunny 57:59
Yeah, no problem. And absolutely. I mean, that’s, yeah, that’s the that’s the challenge with this sort of thing. When you when you’re doing so much good work, how do we cover it in an hour? But yeah, we might have to. I’ll have another look at it, and might have to connect with you again in the future. All the best with the work, and hopefully I’ll connect with you again soon. Thank you. Cheers, righto. Thanks for listening to this episode of economics explored if you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
Obsidian 59:07
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Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
Gene Tunny welcomes Dr Nicholas Gruen from Lateral Economics to explore the decline of Australia’s policy exceptionalism. They delve into the era of microeconomic reforms, the role of neoliberalism, and the challenges current policymakers face. Nicholas provides a historical perspective and discusses potential ways forward. He shares insights from his time advising the Hawke and Keating governments, discussing the successes and failures of Australia’s economic reforms from the 1980s and 1990s.
Since the early 2000s, Australia seems to have lost the problem-solving spirit and policy exceptionalism of the 1980s and 1990s, struggling in various policy areas like energy.
Impact of Neoliberalism: Neoliberal reforms, initially embraced by the left, significantly improved Australia’s economic landscape but also led to unintended consequences.
Key reforms included cutting tariffs, higher education policy changes, airline deregulation, and other competition policy reforms, but some privatised infrastructure assets have not been appropriately regulated post-privatisation.
Challenges in Current Policy: Australia faces challenges in various policy areas, including energy and housing, indicating a need for renewed reform efforts.
Moving forward will require reinvigorating honest, evidence-based policy conversations focusing on problem-solving rather than fixed ideological positions.
Links relevant to the conversation
Nicholas’s YouTube channel where Uncomfortable Collisions with Reality episode will be published:
Transcript: Australia’s Lost Policy Exceptionalism w/ Nicholas Gruen – EP248
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:00
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This episode features a conversation I had with Nicholas Gruen about the loss of Australia’s previous reputation for exceptionalism in public policy. This conversation will also be published on YouTube as the latest installment of Nicholas’s uncomfortable collisions with reality podcast. So check that out if you’d like to watch the video recording in our conversation, Nicholas shares some great insights from his experience as an advisor in the hawk and Keating governments of the 1980s and 1990s he’s well positioned to tell us about what went right during our so called microeconomic reform era. He’s also well placed to provide some great insights into why we’re messing things up so badly right now. I’ll be interested in your reactions to this conversation, so please let me know. You can email me via contact@economicsexplored.com Before we get into it, please be aware I’m taking a four week break after this episode, but the show will return in August. Also, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, without further ado, let’s dive into the episode. I hope you enjoy it.
Nicholas Gruen 01:51
Welcome everyone to another edition of uncomfortable collisions with reality. And my guest not looking uncomfortable is Gene Tunny, my colleague, Gene Tunny and this podcast, this discussion came out of an email that gene sent me as he was reflecting on some of the work we were doing. We’ve been doing over the over the last six months. Gene please explain what the story is,
Gene Tunny 02:21
yeah. So thanks, Nicholas, good to be with you again. What I was reflecting on was that it seems that in a number of policy areas now, we seem to be struggling as a nation. Whereas I remember when I was in Treasury, we told ourselves a story about how we were exceptional in policy, there was this view that of Australian policy exceptionalism, and that was behind our recovery in terms of GDP per capita relative to our OECD peers. We had a productivity surge in the late 90s, and that allowed us to catch up with, you know, other OECD economies. And so we essentially moved from the bottom third of the OECD, the 24 countries, as it then was, to the top third, so the top eight. And there was a feeling that in large part, this was due to the the era of micro economic reform of which you were, you were part of. And, I mean, I’d like to explore that with you. And somehow we just seem to have lost that policy exceptionalism. I mean, I look at various different areas of policy, energy policies, one, for example, where we just we’re really not performing as we once did. I mean, that we things seem to be in a real bit of a mess. So I thought it would be good to discuss that. And I mean, what’s the way forward that we might see if there is a way forward? Yeah,
Nicholas Gruen 04:00
yeah. Well, it’s a subject that I’ve thought about a lot, and I can’t, I can’t sort of give you any easy answers. I can certainly give you plenty of thoughts. And I think, I guess this sort of happens a lot, when new movements turn up, and the movement we’re talking about, whether we use it as a swear word or as a word of allegiance, is neoliberalism and around the world actually certainly true of the United States, and it’s absolutely true of Australia. Australia is an exemplar here, the Neo early neoliberalism was a left of center project. It was taken most seriously by the left. And by the left, I mean the center left, and I mean people like Jimmy Carter, who had the audacity to spark pretty dramatic Airline Deregulation. They had a. Entirely regulated, ridiculously regulated civil aviation sector, in which delta airways, if they existed, would apply to the government to say, we want to go on a new route. And then there’d be lots of discussion about whether they’d be allowed to, and that that even got to them clearing menus of the food that would be would be served on these routes. And it’s pretty obvious that that regulation, if it ever had any, if there was ever any sense to it, was clearly wildly over regulated and stupidly over regulated, and we had that sort of thing as well. And in fact, my father had been part of a kind of a movement in which, I mean, he was an economist, and this was a time of triumph for economists. But I the way I saw it when I was young is that he was university educated, and he was, he was his role in society was to at least make the case as to how we could run this system better, and he was an agricultural economist. And one of the things that I remember. I think I now remember this in retrospect. I mean, I think I heard him talking about it, but I know something of the policy background, which is that in Australia in the 1960s it was illegal to put yellow dye in margarine and Gene you. I don’t know whether you know that, but you can probably extemporize now until and say why that rule existed. Why do you think it existed?
Gene Tunny 06:49
Would it be unfair competition with butter? Yes,
Nicholas Gruen 06:52
exactly, terrible. It’d be terrible for farmers. It’d be terrible. You know, it was against the human rights and farmers, and you can see you can make it’s easy to make this stuff up. We don’t want to mislead people. You know, you can smuggle in these holier than thou excuses for what you’re doing and what you’re doing is what we see every day, which is we see lawyers do it and surgeons do it, and we’re not doing much about that today, just as we weren’t doing anything about this kind of nonsense from farmers and from wharfies on the on the labor side of things back then. And so neoliberalism, in my experience, is a is a revolt against businesses politics as usual. And you’ll find some marvelous descriptions of politics as usual in Adam Smith from 200 years previously, which is business men. They were men in his day. They’re still mostly men today. Re of seldom meet even for merriment, but even for merriment, but that the conversation turns to some conspiracy against the public, yeah,
Gene Tunny 08:07
to fix prices, or something like that. It was it That’s right?
Nicholas Gruen 08:10
Or contrivance to fix prices. Or, yeah.
Gene Tunny 08:13
Can I ask about your father? For those who don’t know, I mean, Fred Gruen. He was an advisor to Prime Minister Whitlam, wasn’t he?
Nicholas Gruen 08:22
Yes, and he was a bit unusual in that regard. But he was a professor of Agricultural Economics who, in 1970 at the end of 1972 picked up Trevor Swan’s chair. He was a Trevor swan was a great Nobel Prize quality economist that Australia produced. But all his Nobel Prize quality work was wasn’t even published. It circulated around Canberra, but something known as this he growth theory. He was an innovator in growth theory. And there is you may. There’s the solo Swan model of growth. I think it’s called or it’s a solo Swan model, or maybe it’s the solo Swan model of internal and external balance.
Gene Tunny 09:11
There’s a swan Salter model, which is internal and external balance. And then there’s the solo Swan growth model, which is the neoclassical growth model. So we had two innovations, yeah,
Nicholas Gruen 09:22
that’s right. And he so he was that kind of, he was that good. And I don’t know, I don’t think either of those were published. Certainly the solos, the certainly the internal and external balance stuff wasn’t, which was basically a diagram wasn’t, wasn’t published. It circulated around Canberra. So dad got that that dad got that gig at the end of 1972 and the Department of Prime Minister and Cabinet were looking around for an external advisor, a consultant, if you like. And it was. Wasn’t the prime minister. And my I think my father was quite proud of the fact that he was a consultant to the Prime Minister’s department, not a political mate of the Prime Minister, although he would have voted for that Prime Minister, Gough Whitlam. And so he then had a problem, because he just accepted this job. This is also, I think this is also a nice thing to talk about, because it talks about a world that’s more or less gone, and that is that he just accepted the chair in this position at ANU, and along came this job that he was would have loved to do, and he basically said, Well, I won’t do it if the university doesn’t want me to do it, because I’ve agreed to do this other job. I don’t think that sort of happens very much these days. And so that was worked out. And he was a part time consultant to the Prime Minister’s department, and he had been an advocate for economic reform, for freer trade, which was, which was really almost every Australian agricultural economist was a an advocate for freer trade and but, but all kinds of things at the same time, his great friend Alan Lloyd was a great campaigner for a thing called the little Desert. So he was an early environmentalist. He was saying, Look, this We’re now developing this land, which is the Ord River in WA was another famous example where it was economists who said, this recipe for development is a scam. It won’t work. We’re not getting the right advice. And it’s it’s a it’s being driven by private interests. And the little desert, a minister in the Victorian Government had a holiday home or something and wanted a road built to the little desert. Now, there may be more to it than that, but this little desert needed to be a national park. And Alan Lloyd, an economist, helped, helped galvanize. He was one of the early campaigners for this. Now, my father wasn’t nearly as strong an environmentalist. He wasn’t an environmental campaigner, but it was the same kind of mentality, which is, we want a civilized life here. Economists are there to help us be rational in pursuing a civilized and rewarding life, not just to optimize GDP. Optimizing GDP is a great thing to do other things being equal, other things are never equal, and therefore we try to make the appropriate compromises in our ignorance as we go.
Gene Tunny 12:48
Yes, okay, and so, yep. So is that a good place to start with, the reform era, if you’d call it that in Australia. Yeah.
Nicholas Gruen 12:55
So that was kind of what I was getting at. So it’s, it’s kind of London to a brick at that stage, for any I don’t know whether that’s an English saying, I suppose it must be an English saying, not an Australian saying. I’m thinking of our international listeners, but it’s kind of obvious that at that early stage there is lots of low hanging fruit. There’s lots of worthwhile things to do, a lot of completely crazy and and and borderline corrupt things going on. And by corrupt here, I don’t mean that any that money is necessarily changing hands. I mean in the sense that Adam Smith meant it, that government decisions are being influenced by private to advantage private people and to advantage private interests. And so this was the early part of economic reform. Gough Whitlam himself was, if you kind of look through the chaos, was this was an important part of Gough whitlam’s political rhetoric, which is that the super phosphate bounty should be justified on economic grounds, and we’re going to take it off the farmers because we’re doing a bunch of other more sensible things. And of course, that turned into a big political bun fight. And likewise, we’re going to take the opportunity in 1973 we had this situation. Remember, we didn’t have floating exchange rates, and we had a lot of pressure on the current there was a lot of pressure to revalue the currency, and we did that as I recall, but we also took the opportunity to cut tariffs because the economy was booming. We didn’t have enough labor. Inflation was taking off, so this was a great opportunity to achieve longer term goals in a way that was very consistent with short term imperatives. So that was early. Uh, that was early neoliberalism, and it was a success. Then along comes a massive recession, and then, and this is somewhat unfair to Malcolm Fraser’s government, but not terribly unfair. Malcolm Fraser wins government, promising jobs, not dogma. Malcolm Fraser is part of a an operation which blames tariff which blames unemployment on tariff cuts. It wasn’t tariff cut. Very little of it was tariff cuts. Most of it is macroeconomic. Most of it’s the state of the economy, which is a different thing, and Whitlam can take some uh, reverse credit for that. Whitlam management the economy was far from exemplary management of the macro economy. And the other main thing that was leading to large scale layoffs in Australia was equal pay for women, particularly in textiles, clothing and footwear. Well, no government so Malcolm Fraser wasn’t going to come out and say it was equal wages for women. That is, that did it. So this thing suffers from politics. I’m not, again, I don’t want to be overly critical of Malcolm Fraser. It’s a bit like being critical of lions for eating meat. That’s kind of what or or business people for making profits. That’s kind of what they have to do to stay in business. And, and, but then, after with this sort of promising towards the end of his reign, towards the end of Malcolm Fraser’s reign, he became famous for giving speeches overseas talking about how great free trade was, and arguing for countries to embrace free trade, and coming back to Australia and not doing a damn thing about how very high protection levels and that that sort of set the scene for the Hawke government and the glory Days, which lasted until arguably the first third of the Howard government, from the whole of the Hawke Keating government, and then in economic terms until 2001
Gene Tunny 17:10
Yeah, okay. And I mean, Fraser government famously sat on the was it the Campbell inquiry report into the financial system, there were, yeah,
Nicholas Gruen 17:22
I think that’s right. It was a record, yeah, that’s right. And then it was the Martin inquiry that the Hawke government had, yeah, when it got in. Yeah, that’s correct.
Gene Tunny 17:30
So I think there’s a general recognition among conservatives in Australia that the Fraser years were a wasted opportunity to reform the economy, to to make it more
Nicholas Gruen 17:46
and and I recall, I think it was the 20, I think this was 19. I mean 2003 I think it was, yeah, it would have been during, yeah, it was 2003 rather an interesting time, because I went to a dinner that was put out, put on by people associated with the think tank. You’re associated with the CI, the Center for Independent Studies, right of a right leaning Think Tank. Now it wasn’t, it wasn’t an official function. Was a whole bunch of people, people like Andrew Norton and a bunch of other people. It was a dinner. It was just a dinner in Melbourne. It was a dinner to celebrate the election of the Hawke key, of the Hawke Labor government in 1983 because that was seen as the beginning of Australia getting serious about economic reform, becoming better than pretty much anyone else in the world, and I think held in 2003 people were already starting to be anxious that the Howard Government, really, having done its having kind of had a near death experience with the GST, just sort of improvised away. We know that when it got control of the Senate, then we need to another reform paroxysm which killed it off. At least. That’s the that’s the folklore, but it but, but by but Howard. I think of Howard as a very momentum free politician. He was a good politician in a number of respects, and I use that term as in terms of virtuosity rather than virtue. He was good at what he did, and he had a certain idea about what he wanted. And I don’t fully I’m not very sympathetic with that, but I have some sympathy for it now in the age of wokedom, of talking about things like practical reconciliation rather than symbolic stuff. But then anyway, that’s another that’s another topic, but Howard lost momentum almost immediately on. Gaining office, the business community was very upset about it. I was working for the Business Council at the time, and it was an attempt at a reasonable interpretation, is that it was an attempt to to respond to that listlessness that Howard said we’re going to have tax reform. And that turned into another major reform episode in Australia, and that was kind of the last one. Yeah,
Gene Tunny 20:32
yeah. So be good to talk about Hawke and Keating, I mean, very consequential government that essentially brought about the end of what Paul Kelly called the Australian settlement. This is something I talked about with my friend Darren Nelson on a recent episode of my podcast economics explored, you know, the conciliation arbitration, the the, you know, the very rigid IR regulation, the tariff wall, White Australia Policy, although that ended under Whitlam, I suppose. But that that had ended before, it had sort of ended before you, I think. And then there are a couple of other elements of the I might have been Imperial preference that had already gone. And there was another. There was one more element, maybe state paternalism, I think it was the his five elements of the Australian settlement. And, you know, that is that really, you know, shook things up. It got rid of the tariff wall. And as I’m sure, we’ll, we’ll talk about, and, you know, various other policy innovations. Can I ask? How did you get involved in it to begin with, you’re, you’re an advisor to John Button. Were you the industry? I
Nicholas Gruen 21:41
asked as an advisor to John Button. I was my first job out of it. Was my first job out of uni, and I got the job. I think, yeah, I think this is how I got the job. I was a volunteer in Gough whitlam’s office in 1977 when he was in opposition. I was at uni, and I used to go in and do a couple of hours filing for his secretary, Roz Byrne, and I’d just go in and do her filing. And occasionally this enormous red faced man would walk in, walk past, say, slaves coffee, and then walk, then walk into his office. And anyway, I met him once or twice, and John Button used to board in ROS burns house in Canberra. And I don’t know whether I don’t know what happened, but I may have said to ROS I was looking for a job or something. Anyway, I started working for John Button when he was Shadow Minister for Communications in 1981 then I went back to uni in 1982 and finished a law degree. And then in 1983 Hawke got in. And so I started working for John Button, and he put and and the government had got in with a classic opposition’s promise, which is General Motors. Holden had sacked 14,000 workers. Ford was sacking people, and the labor policy was that this was a disgrace. Was all the government’s fault, and that what we and we would review it and fix it up so no one had any idea what to do. And I was given this job, and it was completely fascinating, and it sort of extend, you know, I kind of, I’d never studied economics, but I realized, I realized, in retrospect, that I understood a lot about economics because I’d been talking to my dad about it at the dinner table. And one of the strange things that happened was that I didn’t really I ended up making common cause, not with the economists in the what was then called the industry’s Assistance Commission is now called the Productivity Commission and the Treasury, because they were in ways that I can explain extremists of a certain kind. And I I basically made common cause. And then there was John Button’s department, the Department of Industry and Commerce. It took me, I don’t know, six or nine months. John Button said to me, what do they want? And I said, I don’t know. And, and it took me, I don’t know, nine months to work out that they were following Jerry Seinfeld’s principles of life, which is, we’re not thinking anything. We’re just walking around, looking around, and, and they were sort of, they had this immensely complicated system of local content plans and and limits here, and special rules there, and they were just sort of having meetings with all the stakeholders and trying to keep them as happy as they could. I. Yeah. So anyway, I ended up making common cause with people in people like Ed vis board in the department and John spaziovich in the Department of Prime Minister and Cabinet. And these people were all economically trained, but they weren’t economic zealots. They knew that local content plans made no damn sense. They were broadly free trading, but they didn’t get themselves as tied up in the culture war of in the culture war of of neoliberalism, of of economic reform and so on.
Gene Tunny 25:39
So what was the Could you explain the local content plan this? This was highly interventionist industry policy. Was it for the car? Well,
Nicholas Gruen 25:47
I’ll start with a few, a few riddles, if you like, a few questions. Which is, what government body made an independent recommendation to have a local content plan for Australia in the car industry, answer the tariff board, which was the forerunner of the industry’s Assistance Commission that was in 1957 year. I was born then in 1965 al frantic, and was the chairman of the Productivity Commission of the in of the tariff board. And he’s a kind of Saint among us, among us early neoliberals. And he recommended a and he signed off on a report that recommended a local content plan as well. So he was figuring stuff out himself. Now the local what the local content plan said was that in return for the for access to duty free components, so there’s a tariff of 35% on components. You can have free components if your local content is over 95% now this was always a moving feast. And the big thing that came along was not really that. That killed the industry all on its own. We had the oil shock and a swing towards smaller cars that Australia was bad at making. And then everybody looked all the policy makers looked at Japanese cars coming in and said, Well, can we make those here? Which was a terrible idea. And so then what happened was that we watered down the local content plan for them, to get them to assemble here. They started making cars at about 60% local content. 60% local content is basically zero. What we would, what a non economist would think of a zero local content. There’s virtually no pieces. You pick up some tyres and some windscreen wipers and some spark plugs. But basically, this is a fully imported car, imported in pieces and stuck together in Australia. And then it and then, and then they fiddled. And then so there was a 65% local so then we wanted to get their content up from 60% to 65% and then so there was a 65% plan and a 95% plan. And of course, lots of fights between different factions of the industry. They’re saying, Well, you’ve so Holden and Ford would just say, well, thanks a lot. When we’re making serious cars here and we are now discriminated against, these people have got access to these people have got access to 35% of their content, duty free. So then the Department of of do Industry and Commerce would say, well, we’ll put quotas on these so you can only make 30,000 of each of these things. And it just went on. It just went on and on. I mean, let me tell you one other thing, which was a thing called the non reversion rule. And that was that if you had, if you had started buying breaks in Australia, and then your break supplier was a lousy break supplier, or for some other reason you wanted to change, you weren’t allowed to, and you have to get permission from the non reversion from the reversion Committee, which was a body that sat in the Department of Industry and Commerce. And I will say one further thing, which is that in 1974 under the Whitlam government, that rule had been torn up as part of tariff cuts and things like that, and there was a caucus revolt. And guess who, and guess who moved the motion to retain the to retain the non reversion rule, one, one Junior, the. Old, soon to be Junior minister, then back bencher, member for Blaxland. Need I say more? Paul Keating anyway, like Ratigan, Paul Keating changed his tune on a lot of those things.
Gene Tunny 30:15
Yeah, it’s fascinating just how differently we did things back then. I mean, the past is a foreign country, as they say, Isn’t it just extraordinary? Yeah, yeah. And what do you see as the highlights of that reform era of Hawk and Keating? What do you see as the real great achievement? Well,
Nicholas Gruen 30:35
obviously, cutting tariffs, getting rid of tariffs, is a major highlight. I’ll tell you something that I think of we should put further up there. I know well, Bruce Chapman will thank me for this, but it’s not really, it’s not that it was a great intellectual piece of genius, and this is the higher education charge hex. Now that was something that Milton Friedman had suggested, and it’s just bleedingly obvious. And the reason I and so, what it is, is that the government sits there and says, Well, we administer the tax system that makes a great piece of infrastructure, which we can build finance around, and we can say to people, we’ll help you. We’ll fund your education, and you will and then we’ll once your income achieves a certain amount, we will chart, we’ll tax you more, and we will tax some of that money back. So I think of that as the sort of neoliberalism I would have liked to see far more of we also did it for we also did it for child support. So typically ex husbands, but doesn’t have to be it can be ex wives who have left a left some partnership, instead of the ram shackle system that is run by the courts. Once you have a court order, we then run all that through the tax system, and it works like a charm. Yeah.
Gene Tunny 32:07
Can I ask about, oh, sorry, I was just gonna ask about, Heck, yeah, because that was very controversial at the time. I mean, I was in, I was probably in high school at the time, and I remember, like, you’d see all the news footage of the protests at university, and people were saying, Oh, this is the end of free education, and we’re going to be a backward nation. There’s a lot of controversy. What, what do you see as the benefits? I mean, did it allow an expansion of higher education? Well,
Nicholas Gruen 32:34
well, that was the argument. And I think the answer is yes, but I do. I mean, I think that the thing about the thing about hex, was that the argument for Hex, and again, it was a left leaning neoliberal argument, and the argument picked up by the right and the argument for people paying for their own tuition is that, guess who gets their own tuition? People who are predominantly wealthy, relatively speaking, so it’s it’s so it’s very hard to get around the the fact that free education produces a subsidy from the least well off to the comfortably well off and the comfortably well educated. Now, in fact, that gives me an opportunity to kind of complicate my story, because I’m not sure. Well, firstly, I didn’t really agree with the way hex was introduced. We were told fairly arbitrarily when the when the was the RAND Neville ran, was on the committee, and Bruce Chapman is the person who’s the economist, who’s associated with this. The RAND committee, as I recall, recommended that hex recover 20% of cost. Now, my in my way of thinking, if you’ve if you become a lawyer and you’ve become extremely successful, I don’t see any problem with asking you for 100% of those costs back. In fact, I don’t see any problem with asking for 150% of those costs back. And that takes you back to the idea that which, again, neoliberal, neoliberalism is expunged largely which is progressive marginal tax rates. Australia has cut its top marginal tax rate, like almost every other western country, but still has one of the highest, which I think we can be proudest of, not now, that’s we can argue about when it should cut in. But this was one of the, this was one of the what Martin, whether I can call it the jewels in the crown, it was, it was a piece of common sense among economists of my father’s generation that as you get more money, money becomes less important to you. And therefore, if you can take more. Money off wealthy people without messing up their investment decisions too much, either with their human capital or their physical capital, go for it. That’s a good thing to do. So so it’s so in a way, hex is a nice segue, because it shows you that these arguments that the neoliberals put were right and powerful, but they weren’t complete that they weren’t so it’s absolutely true that free education with an ex with the same existing tax system is is, is a certainly in the short term, a transfer of wealth, transfer income, to the well off and moderately well off from the poor, or not the poor, but the working poor. And so that should have been factored in, it wasn’t factored in. So one of the things neoliberalism did is that it bit like modern university education. It kind of compartmentalized things, and it said university fees, we’re going to talk about that as its own system. And there’s some sense to do that, but it’s all in a larger system, and we’ve got to try and do both things,
Gene Tunny 36:23
some other successes of what they call neoliberalism. Now I’m, I’m a bit reluctant to use the term, because it seems to be always used pejoratively. Yeah, and oh, you’re this neoliberal economist as a way of dismissing what economists say. So I’m always
Nicholas Gruen 36:40
where. That’s what always happens with such words, yes,
Gene Tunny 36:45
yes, anyway, but I was just thinking of other successes. There’s the the airline. Was it deregulation? Did
Nicholas Gruen 36:51
we have a two airline policy here? Yeah, two airline policy was crazy, but, but again, let’s have a look at two airline policy. So what we did was we, we had a kind of nutty system, and it was a kind of, it was a compromise that Menzies made. Because I think what happened was that Chifley was sort of halfway through nationalizing airlines at the time, and so Menzies created this cozy little duopoly. And there were nice cartoons of a twin bodied plane flying from from Melbourne to Sydney, with one one of the fuselages had an set written on it, and the other one had TAA, as it was called, trans Australian airlines, which has subsequently became quant well, was subsequently bought by Qantas. So, so that was a kind of complete mess, and it was like the local content plan. However, airlines are naturally very oligopolistic, and so that was an opportunity not, not, not to just think, Well, I think deregulating the airline was with a system was better than what we had. I think that’s quite clear, but it sort of jumped out of the out of, well, sort of, let’s say it jumped out of the out of the fire and into the frying pan. In other words, it is a bit better, but I think we could have done quite a lot better. And let me give you an example of what I mean, quite a because it’s this is hard. It’s hard to interact oligopolies are hard to interact with. Policy finds it hard to interact with oligopolies. Helpfully, it’s one of the problems we have with supermarkets and things. But this is one of the things we could have done at the same time as deregulating the airlines, or a little bit later, actually, we implemented national competition policy. And national competition policy gave us the tools to say to Qantas, oh, by the way, your your terminal facilities, or some chunk of the terminal facilities that we require you to negotiate with us are, I think, the term and the relevant act is, infrastructure of national significance, and any newcomer. Remember, compass was an old newcomer, and a recent one is bonds or airlines. I think it was called, any newcomer has a right to pay you a commercial price to access those resources. We didn’t do that. And in fact, we did something quite different, which is we essentially allowed, and we would have, I’m pretty sure we would have been doing this while it was publicly owned, or majority publicly owned. We allowed Qantas to do what oligopolists do, which is to have price wars, targeted price. Wars against any new entrant, and that’s the exact opposite of the sort of behavior that we want. And so here’s two policy levers that we had, and we sort of behaved as if, we sort of behaved as if those policy levers didn’t exist. They barely were discussed in the in at the time, and one way of thinking about our failures in reform is to say that we went through a very comprehensive process of policy reform, and we had a quite a powerful philosophy of private enterprise, and really no philosophy of public enterprise, of the role of the public sector in in being a good host for the most competitive possible private sector we could have,
Gene Tunny 40:47
right? And so is this why I think I’ve heard you say this before, or you’ve written it that the micro economic reform era, it contained the seeds of its own demise, or, etc, yeah, yeah. Well,
Nicholas Gruen 41:01
yeah. I mean, what I would say is that it, it, it collapsed into a kind of reductive formula. And the reductive formula was that being market oriented was somehow better than not the and so something like re fashioning the CES the Commonwealth employment services as job active and as a network of private competitors. I’m not actually, I’m not saying that’s a terrible thing to do. I’m saying that, if you do it, pay attention to the problems that the public sector, that the public system has tried to deal with, and be confident that you’re doing a reasonable job on them. And if you can do that, then you might some of this might work. But we didn’t really do that. We just we’re in there, and VT, particularly in Victoria, we just said, Oh, this looks pretty you know, this is kind of competitive. It’s, this is sort of like supermarkets or something, and it’s not these different sectors operate differently. And if you were going to play your role as a custodian of the public interest. You have to think about these things in a critical way, not in a formulaic way. So that’s what I that’s the way in which this, these ideas that, and I’m kind of romanticizing it a bit. I think, as a young person, did his what he saw people older than him do, but it as I saw it when it was being built. This was an engine of human liberation in the spirit of the Scottish Enlightenment and Adam Smith. And it was a problem solving. It was a problem solving mindset, and it became an ideology. It became a formula, and we just went from one difficult area of policy after another saying, Well, how hard can it be? We’ll privatize electricity or as much of it as we can. And then, oops, we got the regulation of rates of return wrong on transmission. Well, how much harm can that do? Well, $100 billion of too much investment, that’s how much harm that’s, that’s, that’s not bad, that’s not bad. Just a little, just a little glitch.
Gene Tunny 43:37
Yeah, yeah, there’s, yeah, there’s certainly been problems. And yep, if you’re going to privatize monopolies or natural monopolies, and you need to have effective regulation and, and, well,
Nicholas Gruen 43:48
yeah, and we don’t know a lot about what we’re not, you know, the state of economic knowledge is not so great. We can, we can help prevent things being a complete disaster. But the state of economics is not so great that we can be that helpful in producing a great result from a from a sector like that. But one thing, I mean, another thing that economic reform did, really, I makes me quite angry, actually, is that there were things that were being done, that were obviously wrong economically, and which were not corrupt in the sense of money changing hands, although that might have happened, but corrupt in a policy sense that we would we were the governments were getting away with mortgaging the public interest. And I The example I give. I remember Chris Richardson telling me this at a conference. Now at No actually, he’s not at Access Economics. I don’t think a Deloitte Access Economics. I think he’s playing his own trade. But I remember Chris Richardson telling me that the Commonwealth Government was selling off its offices. Office, and it was selling off its offices so that it could sell them to a property in trust and rent them back. And the rent would be substantially more than the interest that they were paying. The rent would be about a real return of 7% and they were and they the interest they were paying was a real return of 5% just a plan to miserize the public sector and and it’s just just working out on a spreadsheet. And we’ve done this with every tonight, I’m driving out to the airport. If I go on the road that is the most direct route to the airport in Melbourne, I will pay $20 $20 in fees for 15 minutes, either way, on a on a tollway. And that is much more than what I would be paying or the state would be paying if the government had built that and we replicated that, Sydney did this, and Melbourne did this, and it’s being done much less now, for various reasons, partly because these things have fallen over, because the price the private sector got better at doing them, and then ended up having to sharpen its pencil too much. And there were various bankruptcies. Queensland made these mistakes much less than the southern states. As I recall, you’ve got if you’ve had a few of them, but you’ve done rather well because you had a privately built train line to the airport, and that went broke. But I think the state did rather well out of that. Anyway,
Gene Tunny 46:41
costiness, it’s controversial now, because, because of that deal, it’s a 30 year deal and extend it, you know, and certainly the state government got some money out of it, some reasonable money out of it, but, yeah, because it overlaps with the Olympics, like the deal lasts longer than the Olympics. Yeah, we Brisbane City Council can’t run busses to Brisbane Airport, and that’s going to affect our ability to get people to the games,
Nicholas Gruen 47:07
exactly. And so it’s financially very generally speaking, I don’t know about the Brisbane train line, but generally speaking, the this form of funding, because it uses private funding, not government borrowing. It’s about 40% more expensive, but that’s before you count these things where you have to sign away your ability to improvise using the infrastructure you have, which has happened in Melbourne. So we’ve widened the Tollway to Tullamarine airport. And of course, how do we do that? Well, the the owner says, Oh, well, we don’t really want to do that unless you extend our monopoly for another decade or two or three. So you’re basically caught up in this evergreen monopoly, and you’ve signed away your ability to use infrastructure the way you need to use it. It’s really terrible.
Gene Tunny 47:58
Yeah. And so, I mean, look, I mean, I’m, I like the idea of, you know, trying to use the private sector as much as possible, but I do recognize that in many cases, governments in the past have made decisions based on what they saw as a favorable short term budget treatment like the wholesale and leaseback. Yeah, yeah.
Nicholas Gruen 48:19
Well, let me make a rhetorical point, but it’s a pretty important one. We call these mechanisms for these free these mechanisms for funding freeways, public private partnerships. In England, they call the private finance initiative. Now I think it’s really important, a really nice way to crystallize This is to say that with roads, are always public private partnerships. It’s just that they were good private public partnerships when governments designed, funded and then outsourced the building of them. That’s a good that’s an excellent interface between the public and the private sector. The public does its role, which is to stay in control of planning a city, and it’s a cheaper source of funds. So if you keep that reasonably efficient, that’s going to work for you. And then you’ve got the private sector grinding the gravel and and running the steamrollers up and down and laying the concrete. That’s exactly how you know these weren’t these weren’t these, these, these. None of these roads are built by governments. They’re they’re funded by governments. They’re planned by governments. And you really should have a good reason, and so saying you’ve got private funding when this is a thing that Tony Harris, the former auditor general of New South Wales, says, you know, this stuff, we can’t afford to build it. What absolute nonsense. We can’t that’s simply not true. So sort of a throwaway line, and then you end up building something that’s 40% too expensive and. It ties you up in knots for decades.
Gene Tunny 50:03
The other point, I think, is interesting, is one John Quiggin makes. He gave, he gave a really good talk to Economic Society of Australia, Queensland branch a few years ago. And his point is that, I mean, the issue with toll roads is that you’re not thinking as the road network, as a whole network, as a whole system, and you can end up it can be inefficient in an economic sense, yeah, yeah. Just basically,
Nicholas Gruen 50:27
I mean, that is what a transport economist will learn at university and and our trends and the transport economics that our system implemented, didn’t know any transport, didn’t know any of that stuff. That just sort of said, Oh, well, you know, market, you know, we’re going to stick a toll road here. I mean, all of these toll roads. You know that if you ask the question, why a toll road there? Well, that’s just because a particular politician had a particular thing that they wanted to do at a particular time. There’s, there’s no logic to any of that.
Gene Tunny 51:02
Yeah, yeah. And so we’ve got arterial roads clogged, but yet we’ve got toll roads which, which could take some of that traffic, but because there’s a toll on it, people are hopping on it. And in
Nicholas Gruen 51:15
fact, you know, as you would know, Gene hope I’m not being presumptuous. I think you would agree with this. The standard economic textbook answer is, if you want to put tolls on roads, put them on the old clogged ones, not on the new not on the new ones that are not congested. That’s where the opportunity costs are.
Gene Tunny 51:34
Yeah, yeah, yeah, yeah. So you should be charging a court. You know, the congestion charging that economists talk about, absolutely. Yeah. I’m just thinking we’ll probably have to start wrapping up soon. But I want to ask you before we go, yeah, about this great quote from Colin Clark in an article you wrote, you put it in your compare and contrast article about in the early days of the Rudd Government in 2008 Yeah? And, I mean, Colin Clark, at the time was, he was working here in Brisbane, I think in Queensland, is economic advice.
Nicholas Gruen 52:07
No, no, no, he wasn’t. No. He was working for Keynes in England, and he went back to Queensland. But that’s where the quote, that’s the, oh, actually, it says, I want to stay in Australia. So it must have what must have happened is Colin Clark, a great Australian economic historian and economist who was instrumental in building national accounting. Was, I guess he must have been at Cambridge, possibly was at lac, but he was a big contributor to the econocracy, the iconocrates in such as they were in the United Kingdom. I think this is so. This is in the 30s, and Keynes says to him, I think Keynes had the same sort of attitude to Australia as Churchill did, which is us into the world, basically. What the hell would you want to go there? So do you want to read it? I can read it
Gene Tunny 53:03
well. If you you’ll read it with more passion, I think, than I will. So please go ahead. Yeah. So
Nicholas Gruen 53:12
he’s so John. John Maynard Keynes is saying, Look, come to England. You know, we’ll get the band back together. This is really important work to be done here. And he says, I’m reaching the conclusion I want to stay in Australia. People have minds which are not closed to new truths, as the minds of so many Englishmen are. Of course, Keynes would have agreed with him about that, and with all the mistakes Australia has made in the past, I still think she may show the world in economics. And I think of that as a sort of we did show the world. We showed the world with Australian exceptionalism, until around about 2001 and then the politics as usual caught up with us.
Gene Tunny 53:58
We might have to come back and talk about, you know, how we might reinvigorate that exceptionalism. Yeah,
54:06
that’d be good.
Gene Tunny 54:07
I think it’s having honest conversations and and not believe in your own you know. I mean, we have, we seem to have too many fixed positions on some of these issues, and ideology plays a role. But I think to resolve some of these, we really have to be much more open, yeah, and just have those conversations. But yeah,
Nicholas Gruen 54:27
I agree with that. And I also think that there are a lot of people it’s easy to pose as an expert about these things, and the experts actually, there’s a marvelous quote from and I’m he was the editor of The Sydney Morning Herald, and he resigned on a matter of principle about Vietnam. And his name was Tom Fitzgerald, and he gave the Boyer lectures. You can’t get them on the net, which infuriates me. And he said that Paul Samuelson, the great post war. Economist talked about my down under heroes, and what he was talking about was the way in which the economists of the Brigden committee in the 1930s anticipated his ideas about factor proportions driving trade. And Tom Fitzgerald said that economists that good economic policy relies on talented amateurs to it relies on a kind of, you know, people like Henry George, a 19th century economist who came up with a very simple and incredibly important idea and was rather and other more learned economists were rude about him, basically. But I’ll try and find that quote, but, but my point is that, I mean, I, I, well, here’s, I hope this doesn’t offend anyone, but I worked for two ministers, and one of them had an economics degree, John Dawkins and the and then I saw Paul Keating in action. I’m not a huge fan of Paul Keating, but Paul Keating had a terrific intuition about what economics was about. He was the only one who could on the Sunday interview program, explain not that he used these terms. He could explain the principle of comparative advantage. He could explain why it wasn’t in Australia’s interest to have trade barriers, even if other countries had trade barriers. And so in that sense, I mean, that’s what we we need. But what I’m getting at is that everyone and their dog and all the journalists class, they pose as economic experts, and almost an awful lot of these people are kind of surfing. They’re kind of sound. They’re going with the vibe, but they’re not that. They don’t, they don’t. They don’t have a real regard for the simplicity, and was an odd word to use, but the beauty of some of the basic ideas and economics, and that means they just end up confused and following the latest, following the latest, the latest trend, the latest fact. Yeah, yeah, economics is about problem solving, and there’s this whole discipline. It helps a little bit, but mostly about problem solving on the merits.
Gene Tunny 57:33
Yeah, exactly. And I think, yeah. I think you’ve, you’ve given some good examples of how there was that problem solving approach in the 80s. I mean, you talked about hex and, I mean, you know, the various other innovations. I mean, it certainly was an incredible reform period. And, yeah,
Nicholas Gruen 57:51
I mean, another problem we had was the trade deficit. It wasn’t entirely clear whether we should regard it as a problem that was a controversy in itself, but what we did was we adopted a very principled approach, which, I mean, it was haggled through politics, but that was the superannuation system. Now, again, I’m quite critical of certain aspects of the superannuation system, but I think I participated as an amateur in this debate that people rather like, which is, why did New Zealand do so much worse than Australia and we were both economic reformers, and I don’t think anyone really knows, but I think one of the reasons is that we gave ourselves access to a big pot of savings, and we lowered the cost of investing, of investment in Australia, and the New Zealanders did the opposite. They didn’t. They’re, I think the only developed world country that doesn’t have a capital gains tax certainly doesn’t have an effective one. And I think those things, those things might matter, but, but that was an example of a bit like the tariff cut an example of a series of themes being run together and turning into a policy solution to a range of problems. Of course, as is almost inevitable with a system like as big as that, especially set up by politicians, advised by economists. We didn’t get much of a look into certain aspects of it. It also created some new problems, but there you are. Life goes on, and we try and solve those as well.
Gene Tunny 59:33
Yeah, yeah. I’ll have to have a closer look at New Zealand. I mean, the big thing I think about is, I mean, we’re lucky. We’ve got iron ore and coal, and New Zealand’s got sheep. So, I mean, it’s, you know, we’ve, we’ve been very fortunate in some of our the minerals that we have and that we can export, although there’s an argument over whether we’ve properly, whether we’re properly taxing the the economic rents that earned off those resources. Yeah,
Nicholas Gruen 1:00:00
that that might be right. But then again, there’s the we’ve got a, we have a I think right now we’re in the grip of a mild form of the resource curse. And you know, the wealthiest, the countries that have done well in the last 3540 years have been resource poor countries. New Zealand has some fantastic assets in in tourism, in dairy, you know, could have tried to set itself up as an offshore bank. We’re not in offshore banking. Now, that wouldn’t do the world any favors, but it might have done New Zealand some favors the way the Irish managed to get some favors done for it. So but, but anyway, they weren’t really thinking. They weren’t thinking like that. And, but, but, look, I don’t know. And I think it’s the other possibility with New Zealand is that its distance from major markets started to matter more than than than it mattered in the 1970s but it’s quite remarkable that New Zealand and Australia have exactly the same standard of living until 1970 and then they just diverge, and now they’re about 20 25% less well off. One other thought is that there are two countries in the in the developed world, two English speaking countries, that effectively have an elective dictatorship, and they’re the English speaking countries that have done worst, the UK and New Zealand. They have a single house. They have no federal infrastructure. So the game is, you head for the center, you persuade the center to do what you want, and then it does what it wants. And it turns out that that you know that that might not be such a distributing power and having more deals and and more log rolling, more deals done to in the way that we do in the Senate. Of course, it’s, it’s like, like Bismarck said, It’s like making sausages. It’s better if you don’t see them being made, but the result turns out, turns out to be better.
Gene Tunny 1:02:07
Yeah, very good. Okay, Nicholas grew and that was, that was good. I learned a lot about your experience in that in the reform era, and some some highlights from it, and just thinking about how we might do better in the future.
Nicholas Gruen 1:02:23
So Well, there we are. We’ve got a teaser for the next for the next episode.
Gene Tunny 1:02:27
I think so. I think so. So you’re happy to wrap up here. Yeah, that sounds good. That’s okay. Very good. Okay. And thanks everyone for for watching and listening. Really appreciate it. And Nicholas, I’ll catch up with you sometime soon for another uncomfortable collision with reality.
Nicholas Gruen 1:02:46
Thank you.
Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
In this episode, Gene Tunny explores the relationship between government spending and wealth creation. He talks about President Obama’s memorable expression, “You didn’t build that”, and how economists think about the role of government and wealth creation. Gene discusses the roles of both the government and private sector in generating wealth and their impact on productivity, GDP and living standards.
You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.
What’s covered in EP247
Government role in the economy – private sector vs public sector. (0:00)
Government spending and its impact on the economy. (5:52)
Keynesian economics and the role of aggregate demand in determining GDP. (11:51)
Government spending and its impact on productivity. (18:13)
Government intervention in the economy, with a focus on public goods and cost-benefit analysis. (25:11)
Government’s role in the economy, potential for crowding out the private sector. (31:32)
Government impact on the economy and living standards. (38:20)
Takeaways
Government Spending and GDP: Government expenditures can contribute to GDP, but their efficiency and the type of spending critically determine their economic impact.
Private Sector’s Role: The private sector is essential in wealth creation due to its efficiency incentives, but it also depends on government-provided infrastructure and services.
Crowding-out Effect: Excessive government spending can crowd out private investment, potentially reducingoverall economic efficiency and growth.
Cost-Benefit Analysis: It is vital to conduct thorough cost-benefit analyses for government projects to ensure that public funds are used effectively and do not become a drain on the economy.
Links relevant to the conversation
Dan Mitchell’s article on the impact of government spending on economic growth:
Transcript: Government vs. Private Sector: Who Generates Wealth? – EP247
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:00
Jeanne, welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello. Thanks for tuning in to the show. Today, I want to cover an economic issue, and it’s also somewhat a philosophical issue that came up in a recent conversation that I had with Darren Brady Nelson on competition policy. To what extent is the government paid for by the activities of the private sector? To what extent is it a drain on the wealth of the community, is it only the private sector that generates wealth. You may remember that in the 2012 election campaign in the United States, President Barack Obama, in a speech in Roanoke, Virginia, famously said that somebody helped to create this unbelievable American system that we have that allowed you to thrive, somebody invested in roads and bridges. If you’ve got a business, you didn’t build that very, very controversial statement, very I mean, just goes to show what an effective speaker Obama was, that that phrase really captured a lot of people’s attention, and there’s an important economic issue there that I think it’s worth having an Episode on. So yes, I thought this would be a great topic to talk about relevant theory and evidence before we get into it. This episode is brought to you by Lumo coffee. So seriously healthy organic coffee with triple the antioxidants of regular coffee, there’s a 10% discount available for economics explored listeners if you use the promo code 10 explored. So that’s all in caps. You can check out the show notes for further details. Now, I should let you know I’m going to take a break soon from the show. I’ll see if I can get one more episode out before I go on the break. So I’ll probably have about four weeks off and then come back in August. I need to spend some time finalising the book I’m working on, and I need to spend a bit of time on that, but I will be excited to get back on to the podcast, and yeah, looking forward to trying to get more great guests and more great topics. I’ll be interested in your ideas on future topics or guests, or how I can improve the show. Let me know if you have any ideas. You can email me at contact, at economics explored.com, right? Oh, we’d better get into it. One reason I thought that this would be a good topic for the show is after this issue came up in the conversation I had with Darren, I found a passage on this issue in Hanson and Perloff book, state and local finance and the national economy, their 1944 book that I did an episode on a few weeks ago. That was the episode on Alvin Hansen and FC Domar. Now this is a very Keynesian book, and Keynesian economics has become controversial. And if you’re a regular listener to this show, you will know that we’ve talked about the debates about activist fiscal policy, having said that there is, there are some important lessons from Keynes that have been very influential in macroeconomics. So I think while Keynes is controversial, he is an important figure in the history of economic thought, and he has influenced the development of economics, and there are still Keynesian concepts that are very influential and widely agreed upon, even if all of the whole. The Keynesian doctrine and the the primitive Keynesian NISM that we saw in the immediate post war period, even if we now reject that, or most, or I’d say mainstream economists, would would reject that. So with that caveat in mind, we might, we might get into it, because I think what Hansen and Perloff wrote in this book, there is a lot of truth to it. Their discussion of this issue is very illuminating, and hence I think it’s worth us just going through it, and then I will provide some further thoughts and talk about views of other economists and what the evidence is telling us on this very important question. Now I’m going to read from Chapter Nine of the Hansen and Perloff book, public expenditures, income creation and costs. And I’m going to I’m going to start on page 184 and they write that the popular view is that government expenditures and activities are entirely sustained and supported out of income derived from private business. This is quite wrong, as a little economic analysis will reveal the public expenditures made in operating a public school are no less income creating and productive than a private business, say, a cosmetics factory. Indeed, the public school is productive, not only in the sense that it supplies a once satisfying service, as does also the cosmetics factory, but also in the respect that it increases the efficiency and productivity of the future labour force of the nation. Okay, so that very you know, that’s a very good point, and you know, that’s where you know that’s consistent with what Obama was saying, in a way. I mean, Obama’s making the point that public services are helping the operations of the business. Now, of course, you do have to think about the efficiency of those public services or public goods that are provided, which we’ll talk about later. But I think what Hansen and Perloff write, what they’ve written there, is, is sound okay. Let’s go on economic activities, whether governmental or private, involve two operations with respect to their income, with sorry, with respect to their impact in the flow of income, which must be entered on opposite sides of the ledger. And quite erroneous conclusions follow by looking at one side and closing one’s eyes to the other side, with respect to the cosmetics factory, the erroneous argument might be advanced that it is a burden on the community, since the sale of its products drain off a part of the money income flow from the community, that the cosmetics factory is dependent upon all other businesses, since they are the ones that create the income stream and purchasing power enabling the factory owner to find a market for his product. This analysis would, however, be quite unfair to the factory owner, since, in fact, at the same time that he taps a stream of purchasing power and selling his product, on the other side, he turns an equivalent amount of purchasing power right back into the income stream through the expenditures involved in operating the factory, he therefore sustains other businesses just as much as they sustain him. Okay? So, yep, fairly important point there, and that goes to show the the interdependence of all of the the businesses in an economy. So businesses, households and also government, as we’ll talk about, they are all connected. They interact. There’s flows of money, flows of goods and services between them. So very, very important point there we shall proceed. Precisely the same is true of government expenditures and activities. The government, in operating the school, taps a part of the income stream in the form of taxes, but it throws this right back into the income stream through the expenditures made in operating the school. It is not true that government is sustained and supported out of private business any more than the prior than that private business is supported and sustained out of government expenditures and activities in. Okay, so what I would say regarding that paragraph is, look, that’s all fair enough. If we think about it from a normative perspective, though, if we think about it from in terms like more philosophically and make value judgments, where I think some people start to wonder about how we measure economic activity. We’ll get onto this soon, and the value of economic activity. You you might think, well, if we’re talking about goods and services sold in the market, and we work out their value, there’s the presumption that, well, because people paid for those goods and services with their money, with their own money, they at least valued the good and service as much as the price of that good and service, whereas, with government, if the government provides goods and services to the public and it’s funding them from taxation, and we don’t really have a say, I mean, maybe at the ballot box we can have some influence on it, but we we basically have to pay the government. We have to pay our taxes. We don’t really have a lot of say in it individually. Then they provide us goods and services, and when we add them up and put them into GDP, they go in at the cost of delivering those services. But who’s to say they’re really of that value, and we might talk about that a bit later too. So that’s the that’s one commentary I’d make on on what Hansen and Perloff are saying so far. I mean from a factual point of view, from the point of view of impacts on GDP, then they are absolutely correct from the point of view of what this means normatively, or what it means philosophically, I suppose, then, well, you could argue that that may be the case in terms of impacts on GDP, but it may be that the government, what the government spending money on, isn’t sensible. It’s not a good use of our tax dollars. And the point I’ll make even further later is that to the extent that government isn’t spending on sensible things, to the extent that it’s not doing the job it’s supposed to, in terms of supporting the generation of or supporting the productive capabilities the economy, or it’s not providing essential goods and services to the people, then it may well be wealth destroying. We may well have, we may well be able to achieve a higher GDP per capita if we, if we cut some of those inefficient government activities, if we if we cut taxes, if we move towards greater provision of the market sector, that’s a that’s a possibility that I wouldn’t want to rule out. So that’s my one commentary on what’s been written so far. I mean generally, factually, in terms of what it all means for GDP, it’s sound that we should also be thinking about whether we could be doing things differently, whether what government is funding is giving us the best value for money. Okay, we will go on. No private business can sustain its sales volume unless the outlays of other businesses and the government continued to feed the income stream. Nor is private business as a whole self sustaining. It was not self sustaining when the national income fell from 80 billion to 40 billion in the early 30s. So that was the Great Depression. Obviously, that was me saying that not Hansen and Perloff, nor indeed in any other period of depression, the sales receipts of private business, no less than the tax receipts of government, depend upon the maintenance of a high national income, and the outlays of government can and do contribute to a sustained national income no less than the outlays of private business. Indeed, when private business outlays decline, the government alone is in a position to go forward and sustain the income through increased expenditures. Okay, so that’s that’s a very Keynesian one. Point there that in the short run, the level of output, the level of activity, the GDP, is determined by aggregate demand, so the sum of what all of the different sectors are wanting to purchase, in terms of goods and services, and in our national income accounts, GDP, that is equal to aggregate demand, which is equal to the sum of the expenditures by the major sectors. So we’re talking about consumption expenditure, Big C, plus investment expenditure by business, big i, plus government expenditures on goods and services, including infrastructure. This does not include transfer payments, so we talk about them a little bit later. Plus exports minus imports. That’s the net exports component. So we typically see aggregate demand written as C plus I plus G plus x minus m equals y, which is income or GDP, because GDP is defined and is constrained in the short term by the level of aggregate demand, because if people don’t want to purchase the goods and services, then they won’t get produced, and income and employment will fall. So output gets constrained by aggregate demand. That’s one of the core messages in Keynesian economics. And I mean this is, this is something that is widely accepted by economists, that the role of aggregate demand in determining short run, GDP, what happens to the economy in, you know, over in the you know, currently, what, what’s, what’s actually driving economic circumstances? It’s, it’s influenced by the level of spending. That’s, that’s something that’s widely agreed, how, what, what ends up being controversial, as we’ve talked about in in other episodes, is to what extent governments should actively intervene to try to get GDP closer to some desirable level. So Should they actively intervene if GDP, they think GDP is too low for in a depression, should they try and stimulate the economy, or should they try and take some of the heat out of the economy by running a budget surplus so that that there’s more of a debate about, well, there’s a big debate about to what extent governments should be pursuing activist policies, beyond what are called the automatic stabilisers, where the budget naturally reacts to the business cycle, where if the economy slumps, you have less tax revenue, more unemployment benefits. So there’s this automatic stability built in, in a way, and I’ve talked about that in other episodes. So we may not, we may not cover it. I won’t cover it in too much detail. Now, the other thing I should talk about here is this point about taxes and transfers. I said that the government expenditure item in the national accounts doesn’t include taxes and transfers, because where that gets picked up, picked up that will get picked up in the in the consumption spending item so any so what will happen is that if governments, to the extent that governments are taxing and then transfer that money to households, those households spend that money on consumption goods and services, And that gets picked up, picked up in the C item that the transfer spending itself doesn’t add to GDP, it’s just redistributing the taxes and transfers are redistributing incomes from some households to others and helping those other households consume goods and services. Okay, so there’s just one more paragraph from Hansen and perlifer I’d like to read before we I had more of my own commentary the view that public investment is unproductive while private investment is productive, will not withstand careful analysis public investment, just as with private investment, may be merely utility creating, or it may be also or it may also be efficiency creating, the development of a public. Park, swimming pool, playground or concert hall, makes possible a flow of real income, no less than the creation of a radio factory. Public invest, investment in the National Forest, by preventing soil erosion and floods or the construction of school buildings, may contribute to raising the efficiency of labour, no less than private investment in improved machinery. Public investment, like private investment, if wisely made, will be utility creating, or both utility and efficiency created. So yes, the that final, that clause there that that final part of the sentence, where they go, if wisely made, will be utility created, or both utility created and efficiency created. So there, Hansen and Perloff do acknowledge the point that, okay, all of this assumes that what the government’s spending money on is sensible. It may add to GDP in a statistical sense, and it may well employ people, but in terms of whether it actually creates what we might call utility, or whether it improves efficiency, that’s that’s another question that depends on the quality of the spending. I mean, sadly, governments can waste, can waste a lot of money. We can have programmes that that are essentially, you know, not contributing a lot to the community, and end up being brought to a bit. Darren and I, when we chatted, we talked about the National Disability Insurance Scheme here in Australia. So a very noble scheme. And perhaps, I mean, it is doing a lot of good. I suppose there are a lot of people who are benefiting of it, from it, but it is very expensive, and there are, there is a lot of Rorty. Now, all of this is to say that we should be thinking about what the expendit, what’s what’s happening, if what government is doing, whether the dollars that we’re taking that might otherwise be employed in the private sector, whether they’re most productively employed in private or public sector, what’s best for productivity? And that brings me to a famous quote from Paul Krugman. I think it was in his book peddling prosperity. But I could be wrong about that. I’ll have to check that where Paul Krugman wrote that productivity isn’t everything, but in the long run, it is almost everything. So while I I think Hansen and burloff, their analysis of what government spending means in an economic sense is is correct, I’m not, and I think they do recognise the qualifications that I’m about to make. Maybe they have a different judgement as to how, as to how big of a an issue. This is the than I do. But it can be the case that if government’s not spending money wisely, then that’s not going to be good for your long run. Living standards, more spending and transfers, they mean higher taxes, particularly on employees and businesses. And that’s going to impact efficiency. It’s going to impact economic efficiency. Taxes create what’s known as a dead weight loss, an excess burden. They can discourage productive activities. They can discourage people from working or opening businesses. They can discourage people from consuming certain goods and services that that would make them better off. So I think the question we have to ask is, what’s the most productive use for our resources, where we’re thinking about what’s going to deliver the best bang for buck, what’s going to give the best ROI, and we think we should think broadly about what that ROI is. It’s not just going to be, it’s not necessarily going to be what it’s not neces it’s not necessarily, it doesn’t necessarily have to mean that it. It generates an ROI in for the business community, it could be an ROI in terms of providing services, goods and services, education or health, government services that are valued by the community, if a government can do an activity more productively than the private sector. Yeah, or do an activity that the people demand, but which gov but which the market will fail to provide, then that’s fine. I mean, government should be doing that. And so we have various public goods, such as national defence. The traditional example is a lighthouse. You often hear that given as an example, but there’s a wide range of public goods out there. There. There would be a free rider problem if we were relying on the private sector to provide them. So there’s there’s scope for government intervention. But generally speaking, and this is the point I will often make when I’m thinking about, well, when I’m talking about these issues, the incentives for efficiency are better in the private sector, and I think there’s a lot of evidence for that that came out of when governments were reforming public enterprises in the 80s and 90s, we learned about significant efficiency gains that can come from that when governments outsource more of activity, outsourced more activities from the public sector. Clearly, there are failures. I’m not going to deny there have been challenges. There I mean, there have been those botched privatisations in the UK, for example, particularly in rail and it looks like water. So I’m not going to be too I’m not going to be unrealistic or just assume, Oh yes, the market is always going to do things better. But I think generally, the evidence is that the private sector is going to be more well, it’s got greater incentives for efficiency, because if you’re not efficient, you go out of business, whereas governments could, you know, governments keep going, and we tend to see that. Well, I mean public sector unions, for example, or construction unions, which where they have a lot of members working on government projects, they can be very, very influential and affect the efficiency, affect the costs and the efficiency of government programmes and spending. I think that is something that is worth thinking about. Here. I should make the standard point that economists always make that it’s important to crunch the numbers. So we always should be doing cost benefit analysis of programmes and projects. In some cases, we want to do a comprehensive cost benefit analysis. In other cases, it’s, maybe it’s a much smaller amount of money, and it’s more of a it’s not the full blown let’s, let’s do a comprehensive economic study where we’re trying to estimate all of the relevant costs and benefits. It might be more of a desktop exercise, a simpler type of analysis, but we should be thinking, whenever we’re spending money on on government goods as government purchases of goods and services, we should be thinking about the costs and benefits, the pros and cons, and to the extent that we’re not getting that those net benefits, to the extent that we’re not getting a benefit to cost ratio above one, a return on investment, we’re effectively burning money, and the government is then detracting from the wealth of the community, in my view, because that money would pro it would have been better if that activity was not done, if it was, if it if some other activity occurred, possibly in the private sector. And I mean, the last governments have funded many poor projects. They continue to do so, whether because of politics or they, they think that there’s some social benefit that mean, or equity benefit that means that the project should go ahead. One, one example that comes to mind, there’s a new Weir on the Fitzroy River in central Queensland. I actually visited it. I visited it just before it opened. I got a tour of the construction site. Thanks to Sun water, the project proponent. It’s the Queensland Government’s irrigation water business. I mean, it’s a very impressive Weir, and it’s certainly going to deliver some benefits to the community, in terms of, well, there’s, you know, it improves the reliability of water supply. There are some local farmers, they’ve built, uh, they’ve constructed pipes that hook them up to the the weir, and they’re going to be getting water from that. And I think they’re planning things like macadamias and and. Other crops that you need to that you need to water. So there will be some, I mean, you need to irrigate, rather than just rely on the the water from the from the sky, for relying on rainfall. So this is certainly going to expand agriculture, irrigated agricultural production. The problem was, it’s a very high cost dam. It was already going to cost 200 or 50 million, I think it was, and it ended up blowing out its costs. And it’s costing 450 to 500 or something like that. So it was a big cost blowout. And the economics of the dam are pretty of the we are a fairly questionable. There was a business case prepared for it that showed that it had a benefit cost ratio. I think it was under point five. It was, it was rather embarrassing, but the government went ahead and built it anyway, I think because there was such political pressure to build it, and you could argue, well, let’s help it sustain those regional communities. So maybe there’s an equity element to it, but yeah, unfortunately, even where governments do cost benefit analyses, even sometimes they ignore them. So having said about having just talked about the importance of cost benefit analysis, I just note that it’s, it’s not always the cure, and often governments go ahead and, do you know, spend money unwisely anyway. But that, of course, is not going to stop me from arguing always in favour of crunching the numbers right. I might, might go on to a few other things I’d like to talk about before we wrap up. I talked earlier about the the issue, the problems you have when you do have a larger government sector, and you can crowd out the private sector, and you can end up in a situation where, by I mean, that can, that’s going, that’ll affect your living standards. Because even though the government may be boosting, you know, it may be adding to GDP, the C plus I plus G plus x minus m, it could be the case that if those resources were better deployed, then GDP were would be higher and and also, in an international comparison, your GDP per capita would be higher through Well, you know better, better use of resources in your economy. Your economy is more productive, and also because the economy is producing more things that you can sell overseas, that people overseas might want to buy, and therefore that helps improve your exchange rate. You’re not sucking resources out of out of the private sector. So this crowding out, I mean crowding out so well, well known phenomenon in economics. But there was a famous book in the late 60s or early 70s, actually might have been 70s, the bacon eltus thesis, 1976 it was, which was a really interesting diagnosis of the economic problems that Britain faced in the 70s. And this is essentially what led to Thatcher taking over? I did a podcast episode on Thatcher a few years ago. I mean, Thatcher is a, I mean, she’s a very controversial figure. And they’ll, I mean, a lot of people really hate Thatcher. And I mean, certainly she, you know, she was, yeah, she’s, she was a very controversial figure. But the what, if you look at where Britain was economically in the 70s, then really Thatcher taking over and, you know, having to, you know, really shake up the economy. That was inevitable, given that the state the economy was in, the stagflation, the excessive industrial action garbage piling up in Leicester Square in London because there was a strike of the the garbos. It’s, it was really awful time. And this book, this was written by Robert bacon and Walter eltus. So eltus was chief economic advisor to Michael Heseltine, or Heseltine in the Department of Trade and Industry from 1992 until 1995 and he also edited Oxford economic papers. So he was an economist, and he ended up going on to be an advisor to a minister in the major government made John Major followed Thatcher in the he was a Conservative Prime Minister after Thatcher. So their book Britain’s economic problem too few producers that argued that it was the rapid expansion of the public sector that was contributing to Britain’s economic difficult. Is during that period because it was taking resources. It was taking labour and capital out of more productive uses of the private sector and into the public sector. And yeah, so that was a rather influential book at the time, and I’ll put a link in the show notes it. It goes to show that. And I think this is a this is a qualification that I think Hansen and Perloff themselves would have accepted, that, you know, while the government can contribute to the wealth of the community, while the government can help the private sector be more productive. And while the government can provide goods and services and it can invest, it can it can provide capital goods. It can produce public capital, public assets that are of great value, unfortunately, it can also produce things services that aren’t, that are inferior, that are that aren’t as good as what could be provided in the private sector, and in those cases, that it’s subtracting from the the wealth of the community, or we could be richer if we had a shift from government to the private sector. So look, it’s a difficult one, because I do recognise that I get a lot of benefit myself out of public services. In particular, what I the one I think about all the time is the Roma street Parklands in Brisbane, which were built by the state government. Here, there’s an amazing park with a beautiful spectacle garden. And there’s a a great walk that I go on every morning. I go up to, up to the parklands, and I walk through the parklands, and there’s a there’s a rain forest, part of it, there’s a bridge, the Fern Gully bridge, I think it’s called that. I that I go on. It’s been, it’s closed for maintenance at the moment, but it’s just amazing. And that’s that’s a public asset, and my life is is better because the government built that, that public asset and and they maintain it. So I’m not going to say, look, government’s terrible. Let’s get rid of government some government services are are valuable. There are at the same time, you’ve got to recognise that there are cases where public provision of services is is subpar and it’s not. Maybe we could be better off if we have a shift to the private sector. And I mean, maybe this isn’t the best example, but we know that there are a lot of failing government school funded schools out there. We have a real problem in Australia with the lowest performing schools. I think they’re letting down the people in those in the areas where they they’re serviced by these subpar schools. And we should be thinking about whether there’s whether there’s an alternative, whether we can rely on greater school choice, charter schools, etc. That is a big issue, and one I should come back to in a future, a future episode. One person who has a really good take on this issue that we’re talking about today is Dan Mitchell, who is a is a guest. He’s been a former guest on this show. Dan’s been on, oh gee, a handful of times at least, we had a conversation recently about US debt. Dan wrote a really good piece on relevant to this question of how government impacts the economy, how it impacts wealth, the impact of government spending on economic growth. This was for the Heritage Foundation. This is, this is about 20 years old. This piece, I’ll put a link in the show notes, it’s very good. Dan writes that economic theory does not automatically generate strong conclusions about the impact of government outlays on economic performance. Indeed, almost every economist would agree that there are circumstances in which lower levels of government spending would enhance economic growth, and other circumstances in which higher levels of government spending would be desirable. If government spending is zero, presumably there will be very little economic growth, because enforcing contracts, protecting property and developing an infrastructure would be very difficult if there were no government at all. In other words, some government spending is necessary for the successful operation of the rule of law. And then he goes on to say that, that said, well, in his view, most government spending has a negative impact. And. And there’s overwhelming evidence that government spending is too high and that America’s economy could grow much faster if the burden of government was reduced. Okay, so that those point, those final points, are probably going to be more controversial. But the I think what the passage I read out before from Dan, I think that’s, I think that’s very non controversial. You know, he’s saying it’s all about getting the right mix, the right balance. And then you can have an argument over whether, you know, we’ve got too much or too little at the moment. I mean, I probably share Dan’s presumption that we’ve got too much government. But then there are others. I mean, folks at The Australia Institute here in in Australia, and they’re arguing, oh, we should actually have more tax, we should have more government spending, and we’ll be better off. Okay, that’s, uh, that’s an interesting perspective. It’s not one I share. But, I mean, they’re entitled to it. Perhaps I’ll, uh, I’ll have, I’ll have Richard Dennis, or one of his colleagues on the show one day to talk through that. Okay, so that was, that was a broad discussion about the theoretical and philosophical issues associated with government involving in the economy, and to what extent it affects, like, how does it affect living standards? How does it affect the wealth of the community? I mean, clearly we just can’t say something like, government doesn’t create wealth, it just subtracts through wealth. That’s not true, but we should be thinking critically about the how our resources are used in the economy. To what extent are they used by government versus the private sector, and whether we can have a better mix, whether we could be have a higher GDP per capita, whether our living standards could be higher if we move resources out of government back to the private sector. I think that’s a that’s a legitimate question, even if the sort of the simplistic point, or the simplistic argument that the government is just dependent on the private sector and it’s it doesn’t create any wealth itself, even if we reject that, we still recognise that government can be too large. And in the view of economists such as Dan Mitchell and myself, I must say, I think it is too large. I think we would be better off with a smaller government. Okay, one point that you know, I’m going to talk a bit about empirical evidence now before we wrap up, because I think it’s important to always look at the data. What does the data tell us? And Dan, Dan always saw talks about these OECD studies, so he always criticises the OECD you says, Oh, well, you know, you’ve got all of these bureaucrats over in Paris and highly paid and but they’re they’re always saying, Oh yeah, let’s just raise taxes on everyone and spend more money. However, he does note that their research departments, the research part of the OECD and also the IMF, often produces research which contradicts the policy views that are being advocated by these international bodies. And Dan wrote a post, OECD Economic Research finds that government spending harms growth. I will link to it in the show notes. This was back in 2016 very good post. And Dan wrote that a new working paper by two economists at the OECD contain some remarkable findings about the negative impact of government spending on economic performance. And what it found is that, yeah, there certainly is an impact that when they did the cross country data analysis, they did some econometrics, if I remember correctly, they found that larger governments are associated with lower long term growth, and larger governments also slow down the catch up to the productivity frontier. Okay, so the larger the government sector, that’s going to constrain the productivity of your economy. It’s going to adversely affect it, which is in line with what I was saying before. Okay, so there’s some good evidence there. I’m going to link to that in the show notes. That’s, that’s worth that’s worth checking out. Okay, so I hope you found that episode informative. I think it’s an important question, and it it is worth us thinking carefully and critically about how government does impact the economy and our living standards. I’ve given an introduction to this topic and have provided some of my own views. Now, of course, they’re my views, and your views may differ. You may have. Different experiences. I mean, you will have different experiences from me. You may be aware of of different evidence that’s out there. So I yeah, I’d really love to hear from you if you have any thoughts on what I’ve said this episode. If you think there’s there’s evidence, or there are points that I should be considering, then please get in touch. Let me know what you think. You can email me at contact@economicsexplored.com I’d love to hear from you, and I hope that you tune into a future episode. So I’ll be taking a break soon, but should be back strongly in August 2024 I may have one more episode before then I’ll see how I go. But thanks for joining me. I think this is these are important issues to talk about, and I really hope you got something out of it. Thank you. Bye.
Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
This episode explores the crucial role of efficient financial management in driving business performance and productivity. Guest Andrew Walker, a seasoned financial consultant, shares his extensive experience advising businesses on utilizing data for improved cash flow and strategic decisions. Walker emphasizes the transformation from traditional bookkeeping to strategic financial planning as businesses scale.
About this episode’s guest: Andrew Walker, CEO, Improcus
Andrew, with over 30 years of executive management and accounting experience, across global and local markets, brings a depth of experience and credibility built across the manufacturing, retail, franchise, construction and transport sectors. Whether as CEO or on the shop floor, Andrew understands the challenges and demands of business. Andrew has an intuitive understanding of business in both financial and functional areas. His work experience includes:
CEO of Improcus, a South East Queensland business improvement consultants company/business and has worked with 100 companies in 10 years with an aggregate annual turnover of $1.0b CEO of AAF Industries Plc, a London stock exchange listed company specialising in design, manufacture and installation of modular buildings in Europe. The Group also included a laboratory furniture manufacturing business and a scaffolding division.
CFO BTR Dunlop Ltd, listed on the Johannesburg Stock Exchange, responsible for all South African operations and the Financial Controller for Africa reporting to BTR PLc. Turnover R1.0billion
Divisional Finance Director of Dorbyl Automotive Components consisting of 16 divisions supplying various automotive components to OEM’s.
Financial Controller for the Aberdare Power Group, the largest manufacturer of power cables in South Africa
Business productivity, taxes, and insolvency. (42:37)
Financial reporting and cash flow management in businesses. (46:54)
Takeaways
The Peter Principle in Finance: Promotion beyond competence in finance roles can critically hinder a business’s growth. It’s crucial to elevate financial management capabilities as the business scales.
Automation and Efficiency: Leveraging modern software and automating processes can significantly reduce time and errors in financial reporting, enabling quicker strategic decisions.
Strategic Role of Chief Financial Officers: A CFO’s role transcends traditional bookkeeping, focusing on external growth opportunities, mergers, acquisitions, and stakeholder management. Understanding when to transition from a bookkeeper to a CFO is key for business evolution.
Data Utilization for Decision Making: Effective use of data, including forecasting and performance analysis, is essential for driving strategic business decisions and identifying areas for improvement.
Cash Flow Management: Proactive cash flow forecasting and management are critical for navigating financial challenges and seizing opportunities, underscoring the importance of a competent finance department.
Abbreviations used in the show
ATO – Australian Taxation Office
BOM – Bill of materials
CFO – Chief financial officer
CV – constant velocity, as in CV joint
DIFOT – Delivery in full on time
ERP – Enterprise resource planning
GST – Goods and Services Tax
IPO – Initial public offering
PAYG – Pay as you go
Transcript: Unlocking the Financial Black Box: Transforming Business Efficiency w/ Andrew Walker – EP232
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Andrew Walker 00:04
I come across businesses, where the bookkeeper who started out with the original owner is now the CFO. And that’s the real old Peter principle that applies to finance departments as well. So, and when you have a person that has been promoted past the level of competency, what happens is they then start employing incompetent people below them.
Gene Tunny 00:33
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. This episode of Economics Explored explores business performance and productivity with our special guest Andrew Walker, a financial consultant who works with businesses to improve efficiency and profitability. Andrew has over 30 years of executive management and accounting experience across global and local markets. He’s advised major companies in the manufacturing retail franchise construction and transport sectors. In this episode, among other insights, Andrew talks about how businesses could better utilise data to improve cash flow and drive strategic decision making. This episode of Economics Explored is brought to you by Lumo coffee Lumo is seriously healthy organic coffee. Lab tests have confirmed that Luma coffee has tripled the amount of healthy antioxidants and poly phenols than regular coffee. Health benefits from these poly phenols include a lower risk of heart disease, anti inflammatory effects, and improved mental and physical performance. Lumo coffee would like to offer economics expert listeners at 20% discount off all coffees for a limited time only until the 30th of April 2024. Go to Lumo coffee.com. And at the checkout, use the code explored 20 That’s all uppercase, X floored and the number to zero for a discount on all Lumo coffee valid until April 3020 20. For that code again explored 20 Check out the show notes for further details. Right. Oh, we’d better get into it. I hope you enjoy my conversation with Andrew Walker. Andrew Walker, thanks for joining me on the programme. Yeah. Good to see you again. Gene. Yes. Excellent to see you, Andrew. So I’ve been along to some of your breakfast. You’re very good at organising people. And you’ve got a really good group here in Brisbane, of business people, people with experience in the practicalities of running businesses and growing businesses. And I’m keen to pick your brain today regarding business performance and business productivity, because as economists we drone on all the time about efficiency and productivity, making a penny Dewar pounds work as my grandfather used to say something very critical, not critical, but a joke about economists. So I’m interested in your reflections as someone who who does work with businesses and advises businesses. What is it that other barriers to high performance? What is it that’s limiting the efficiency? The productivity of businesses, please? Yeah,
Andrew Walker 03:49
well, Gene, I think one of the there’s there’s a number but let’s start off and talk about some of the key ones that I deal with from a financial perspective. For example, inefficient processes. You know, outdated, convoluted processes can slow down the operations, waste, valuable time and resources, inefficient workflows also, and redundant tasks and excessive bureaucracy can contribute to decreased efficiency, and some of these sorts of things. For example, if you remember back in the day of mainframe sales, IBM had a salesperson of business development and design team, a credit approval team, and they were taken up to six months to turn a potential quote into an order. And they actually changed the whole process and made the salesperson, the responsible person to make sure it went through all the departments efficiently, and they reduced the time substantially. So I did some work with a franchisor on his sales process for bringing in franchisees and they were taking exactly the same thing six months around actually trying to vet the people, get them in, talk to them. And if you’ve got good franchisees if They’ve got the money, they want to take the opportunity, they can’t wait six months for somebody to decide whether they’re going to come in. And so we went through a workflow process, identified the issues, and actually cut that right down to one month to get the activity of signing up more franchisees a lot quicker than waiting six months to go through the whole process.
Gene Tunny 05:18
Right? What what sort of business was it that were broadly what industry was
Andrew Walker 05:22
it? I it was in the, in the industry in motor vehicles?
Gene Tunny 05:26
Right. Gotcha. Okay. Right.
Andrew Walker 05:29
You know, and other processes. For example, when we talk about processes, people immediately think about a manufacturing process in an organisation. They are lots of other processes that are actually embedded in the business. For example, I did some work with a large scaffolding business a couple of years ago. And the important thing there was their debtors were, you know, way above what they should be, and we brought them down from I think it was 65 days to I think, 45 days, there was an inflow of $1.6 million in the small business now. That’s, people think, Oh, well, what do you do, but you’ve got to examine the whole process from taking a new a new customer on what’s their credit limit, what’s the process of resolving credit notes quickly and efficiently. And so that you remove all the reasons for them not to not pay the business. And so having identified the process made people accountable within the organisation we were able to bring, the data stays down. And that helped in the sale of the business, because what was happening is we were setting the business up for sale. And the working capital average, when you sell a small business always catches people, because they think that debtors are are going to continue at that high level. And when you bring them down in a sale process, you actually have created an average working capital higher than what you should have. And therefore you’ll end up having to chip money in at the end after the when the deal is done.
Gene Tunny 06:56
Could you just go over that? Again. I’m just trying to make sure I understand that book. So I think you’ve identified a critical issue for any business, which is the cash flow. I mean, cash is king, and a lot of businesses get into trouble because they can’t manage their cash. And you had an example where did you say debtors days? So the people who owe your business money? Was it 60 days or something
Andrew Walker 07:21
like that 60 days, and we had to bring it down to 45 days to bring it in terms. And so if you when you start negotiating the sale of your business, especially with the purchase, I will lock in a date. Yeah. And in order. And through that process, I look at the last 12 months. What is the average working capital? Yeah, and when the actual transaction happened six months later, they use the average working capital. And when you hand over the keys to the business, they then calculate what the working capital is on the day and apply amid the metric to the average working capital of the previous 12 months. And if the working capital is lower than the average 12 months, the seller has to put the money into. So before you sell a business, you’ve got to make sure your balance sheet is actually well organised. The debtors are clear the creditors are always paid in terms that you can have a really good quality working capital base.
Gene Tunny 08:18
Yeah, so you’re gonna get all that lined up. So with the 60 days, on average, they were taking 60 days to pay. Right? So this business wasn’t chasing the invoices up is that right? That they weren’t managing their invoices properly? Well,
Andrew Walker 08:33
there was a lot of issues in there. Because first of all, getting the right customers, okay, don’t take on customers who are probably dodgy. So part of the whole process is, make sure you’ve got good customers. Yeah, make sure they understand your processes, and your terms of trade. And if they have credit notes, it’s important to get those credit notes processed quickly, because that becomes a reason for non payment. Right? What
Gene Tunny 08:57
What do you mean by that? Can
Andrew Walker 08:58
you explain what you mean by if I have the business $100,000 And I’ve got $3,000 I’m queering and questioning because the service didn’t happen or the product wasn’t supplied, or it’s a bad quality product. I use that as a reason not to pay the full 100,000 Yeah, so you know, it’s about processing those credit notes really quickly.
Gene Tunny 09:19
Gotcha. Okay, yeah, sorting, sorting out those issues. And so
Andrew Walker 09:23
another another sort of area is lack of automate automation, in a in a business. And once again, we straightaway think of the factory with robotics and welding and that, but also in the whole financial process, automating all the different systems to produce the financial management report to the end of the month is important. And I had a client this goes back a good few years, and their finance team took 30 days to produce the management reports of the previous month. And it was just out of control. And it was spreadsheets upon spreadsheets upon spreadsheets reconciling, reconciling reconciling and and when you When you when I laid it out on the boardroom table, because the owner didn’t believe this was this was a 30 30 million is probably a 30 40 million business now. I laid everything out on the boardroom table and said, right, you reconsider your team reconciles the spreadsheet to that spreadsheet. And I said, this is a waste of time, I said, let’s just let’s invest in some software changes. And the software changes, push the data from the ERP system straight into the financial system, they were able to produce the reports within three days, which is where you get to real world class standards. Okay,
Gene Tunny 10:33
so just for those of us who aren’t familiar with the lingo, ERP stands for enterprise
Andrew Walker 10:38
resource planning. So it’s the whole, it’s the engine room of the business. So you’d have a financial system. And then you have the engine room. So if it’s a manufacturing business, it’s the bill of materials, it’s the labour, it’s the planning, all of those things around that create the activities, which then create a financial transaction that gets pushed into the financial systems in the business
Gene Tunny 11:01
by their software packages, or applications you’d recommend for this sort of thing? Well, no, it’s
Andrew Walker 11:05
about understand well, what I found in a lot of businesses that are getting involved in is the inefficiency is they’ve bought really good packages, right? The implementation has only a 20% delay, okay. And so it’s about understanding, yeah, people have done and then actually increasing the implementation of those packages up to the right level. And so in this instance, it was using the existing ERP system, changing the report writing, creating the link straight into the financial things. So there was no reconciliations and wasting time, they had a saving because we then were able to let the Financial Controller Go, which was $100,000, salary, wasting time doing all these requests, because that was they were they weren’t adding any value in the business. Yeah, in a perpetual income 100,000 a year, that’s a million dollars in 10 years that you’ve saved by simple small automation within a business. Yeah.
Gene Tunny 12:00
And this is, I mean, this is across the economy, right? This is what I think’s interesting about this, because as economists, we we tend to assume competition, competitive markets, weeds out the inefficient operators. And to an extent that’s true, right? I mean, that’s, that’s obviously true. You do have the situation where there are many businesses that just aren’t living up to their potential. They’re, like 10 or 20% off what their potential is. I don’t know if it’s that high. But for many it could be I mean, there are there a lot of there’s still a lot of inefficiency in business out there.
Andrew Walker 12:30
You know, I was dealing with a fast moving consumer goods business, and they were, they were processing different kinds of sources, which the order would come on a Wednesday, it would be cooked Wednesday night, it would be processed Thursday, it would be on a track Thursday night, into suddenly for the shelves for the weekend shopping. They they Dafydd delivery in full on time was was around 76%. And and you know, that whole process, they had implemented SAP, yeah, but they’ve never taken it into the production area. The production painting was sticky notes or post it notes stuck on production planners wore a telephone note, you know, telephone call and email, open the door, the wind blows, we’ve lost a few levels of
Gene Tunny 13:17
production cafe, right? Yeah,
Andrew Walker 13:19
exactly. And so what happened was, you know, I’ve, I’ve pushed this all out, and we then moved as SAP implementation into the production process. And that then opened it up. And after two months of working with the team there, I’ve got it up to 99%. Three months in a row, we achieved 99% The effort, and we also moved the business away from product centric, to customer centric at the same time, which customer centric had more margins than product centric, because product centric was high volume, this just get hot volume into this.
Gene Tunny 13:53
It’s gonna ask you about this die fight. I haven’t actually heard that expression, or haven’t heard it spelled as or set as die fight. It’s a good one. I understand what what you’re talking about. I mean, that’s 76% that’s, that’s terrible.
Andrew Walker 14:07
There’s more. So what happens is you lose then shelf space in the supermarket, because you’re not there on time. So you, you you get removed from the eye level shopper wants to pick off the comfortable level and you say your shelf space then moves down to the bottom shelf, because other people have got in front of you in terms of your your your space allocation within in the supermarkets and boutique.
Gene Tunny 14:29
Sorry, the supermarkets in the TV boutique shops selling the sources in APA Gotcha. Are they met other benchmarks for what all of these metrics? So you’re, you’re a former or you’ve got experiences as a chief financial officer, is that right? That’s correct. Yeah. And are there benchmarks or commonly accepted benchmark standards for what those data days should be for what die fight should be that sort of thing. Like when you go into a business that you Are you saying, like, based on my experience or based on industry benchmarks, you’ve got to be hitting these key metrics. I think
Andrew Walker 15:08
every business, you’ve got to actually look at it and understand it. You can’t just have a, there’s not a standard, there’s a standard bent benchmark, let’s say 45 days for dead end. But if half of your sales are cash, yeah, then it’s not 45 days, it’s probably 20 days. So when I walk into a business, and I start reviewing it through my model for real improvement, I have a look at that and say, Well, if 50% of your sales are cash, we exclude that out of the calculation. Otherwise, you look pretty good, because you might be reporting 30 days. And if the benchmarks 45, but you’ve got cash at 50% It’s actually misleading. So yeah, and our fight with that fight is about delivery in full on time. Yeah. 100%. Yeah. There’s no question that’s, that’s a standard you need to achieve. And so there are lots of different ratios. And the one has to just examine the business and identify, what are the key ratios and drivers that drive profit in the business?
Gene Tunny 16:06
What was his model for real improvement that you’re talking you’re talking about?
Andrew Walker 16:10
Okay, so I’ve I’ve developed some software offers a German platform, and the software is called jeddaks. And so that actually brings the financial information in. And I’ve developed a one pager that shows how to improve the business by making high level strategic decisions in the business, if I reduced it as days by X days, if I reduce stock by y days, and I put creditors out by another two days, what is the cash impact, but that is using all the historical information. And then I do the same on the profit and loss in terms of sales price increase, volume increase, expense increase, and then that’s all hinged around the DuPont, you’ll probably know the DuPont analysis, going back to the 60s, right created the return on capital employed. And then on top of that, I’ve then introduced cash flow to that to the point analysis, because now when he developed it was about return on investment return on capital employed. Today, it’s all about cash, cash is king, as you said earlier, so I’ve got this model for real improvement, which also helps then link corporate strategy to the financials. And then you develop that if you say you’re going to increase your your turnover by 10%, you then have to drive that in the rest of my modelling down to which product, which customer, what price, what product, what channel, and that then makes people within the organisation at the coalface accountable to the corporate strategy. So that’s the one of the big things that are found. We are very good at vision mission and fluffy stuff. But when it comes in to managing the actual coalface, it gets a bit difficult because it gets blurred. So my model for real improvement then looks at and says, that customer that price in that month on those products goes up by 5%. And that’s how you achieve it. And if you’re not achieving it, then people become answerable on that monthly management sort of review process. Right, which is what happens sometimes in businesses is the turnover goes up 10% For something totally different reasons. The core strategy is never dealt with. But we all pat ourselves on the back saying, Oh, we we achieving our corporate strategy, when in fact, we haven’t addressed the items that was identified at the strategic sort of review. Right,
Gene Tunny 18:30
gotcha. And how do you make sure that the people at the coalface are doing the things that need to be done to hit the targets? I mean, I do go and talk to them. You have dev workshop with them how to,
Andrew Walker 18:43
okay, so I’ve been, I’ve been working with a group of highly intellectual individuals in a business, I like to keep them the name out of the podcasts. And they were very focused around delivering their professional skills to their clients. Yeah, with no concept of profit. And there was just one high level p&l, then actually, and the profit had come down over a number of years. And you know, it was on a reduction, and I got involved to help them. And one of the things I did is turn it on its head and said, Well, hold on. You’ve got regions here, let’s let’s put in regional profit and loss statements, and then make the regional managers accountable. And then in this modelling of mine, I then took it down to how many hours are each of the people going to be working? What is the efficiency? What is the sale rate, what is their cost rate? And so now we’ve got this model that they can actually change every month in terms of this person is going to be off for three weeks or take him outside adjust the turnover. And this modelling then creates the three way financials, cash flow, balance sheet and p&l. And so that date in every, every month we review it and have a look at what’s happening within the business and make adjustments to look at the full We have forecast, as a result of I think, as a result to bring in that to play in the organisation, together with focusing around improving the efficiency of the computer system they’ve got they’ve got a cracking system, but they weren’t even touching the surface in terms of the capabilities of that software. I think the this year if it all goes to plan, we would have trebled the previous year’s operating profit.
Gene Tunny 20:25
Wow. Right. And that’s by giving people a better understanding of, of what actually contributes to the bottom line, what the
Andrew Walker 20:36
there’s an understanding hours rates, cost, expenses, margins, selling price to customers, all those things come into play when you’re having those discussions. Gotcha. Okay.
Gene Tunny 20:47
Are there any other barriers? We’ve been talking about barriers to to higher performance?
Andrew Walker 20:53
Yeah, I think, you know, I’ve got an interesting one. And this is, this is where the company starts out very small, the owner brings in the bookkeeper. And as the business grows, he doesn’t look at the finance department, and let it grow with the business and bringing the right financial level skill. So I come across businesses, where the bookkeeper who started out with the original owner is now the CFO. And that’s the real old Peter Principle and applies to finance departments as well. So and when you have a person that has been promoted past the level of competency, what happens is they then start employing incompetent people below them. And because they can’t afford to do the work because of the level of competency, and this always becomes manual and then and so I have this thing, we all know E because mc squared is speed of light, I say the Peter Principle of competency plussing competencies in competency cube, which is the speed to insolvency. And so and I’ve seen this before, we’re the bookkeeper, you know, rises to that position. So as a business is growing, it’s not a barrier, but it’s been able to recognise that as your business grows, you need to introduce different levels of people within the organisation. So you’d start out with a bookkeeper, maybe you then have the tax accountant to a point sometimes people hold on too long to the tax accountants, as the business is growing. And then you go to a financial controller, or Phantom, CFO, Lakhmi, or who then when it gets big enough, you need a real CFO and people don’t understand what a CFO is, versus a financial controller either, you know, CFOs, external mergers, acquisitions, stakeholder management, etc. And you’ve got to be ready to grow at that level before you start bringing CFOs into your business
Gene Tunny 22:46
for CFOs. You’re you’re about creating possibilities. We’re not just being a bookkeeper. But what are the risks? I mean, you can expand on that, but what are the risks of just having the person who started out as your bookkeeper become? Your effective, you know, become the CFO of as your business expands from being a small business to having, you know, millions or 10s of millions or hundreds of millions in revenue? What are the risks? What can go wrong?
Andrew Walker 23:10
Well, I think that the risks are, that person doesn’t actually grow with the business and start looking at the risk profile. You know, if we talk about a bookkeeper does the accounting the day to day bookkeeping of the business, but as you start growing, you start getting increasing your debtors? What about credit limits? What about the risk profile? What about your insurance? What about the systems as your business is growing? You know, a good CFO strike financial controller will be in the business, he’ll have the accounting work working really well. And a good solid bookkeeper is a person who consistently does the same thing all the time, at a high level of quality. And a good CFO will be across the business looking at systems and processes and thinking outside the box. Yeah, I think that’s the difference, I think. And I say this, and I’ve come up the finance route, so I can be critical of my own professional. Good Financial Controller doesn’t necessarily make a good, a good CFO, in the in the different financial controllers, inwardly focused, producing management reports, running the business. From that point of view, a CFO is looking externally outside the business risk profile opportunity to grow. Yeah.
Gene Tunny 24:22
So on these risks, I’m just so where the businesses get into trouble. I mean, they can I mean, some are just there are some that are going to be unviable. But there are many businesses that that actually end up. You know, they end up basically having to wind up because they mismanaged their cash or that if
Andrew Walker 24:41
you talk to any or most liquidators administrators and you say to them, what is the first impression you have when you walk into one of these distressed businesses? And they’ll tell you 80 to 90% of the time, the finance accounting departments in a mess, right, yeah. And that’s where you then have a bookkeeper who He’s become the CFO doesn’t understand the risks involved in running a much bigger business because their, their, their, their processes around transactional, yeah, processing, invoices credit, all those sorts of things and not looking at the bigger risk. And that’s that’s the real issue with regard to you know, these distressed companies, the accounts are in a mess. So you don’t know your product profitability, your customer profitability, where your market growth are, what’s your gross margin? What’s your breakeven, all those critical things that good? Finance controller Cummins CFO?
Gene Tunny 25:37
Net? Right. Yeah. So you could be losing money? Yeah, you’ve got you haven’t got your you’re not? You’re not selling in the right areas? You haven’t got your pricing, right. You’re not making enough money? Yeah, so yeah. Okay.
Andrew Walker 25:52
And so that comes to to what I call the financial blackbox. Yeah. So before you take off in there are playing on your journey of building this business, know what’s in the in the black box. And that’s around understanding what the financial department does, and how they can add value in your business. A lot of finance departments are seen as an overhead, an extension of the ATO to do the best and the GST and the PAYG, etc. But the finance department in a good business provides really quality information to help people make good decisions around what they do in in their business.
Gene Tunny 26:32
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 27:06
Now back to the show. What are they doing? You’re doing modelling of, of, you know, what different scenarios? Are you thinking about shocks that could hit the business, what sort of works been done in
Andrew Walker 27:21
terms of just a normal. So the way I approach when I look at businesses and I’ve I’ve asked to come in and help, they could be distressed, or they could be growing exceptionally and need some support. The first port of call is the financial system, the financial systems have to be sound and producing accurate quality, timely numbers. And once you’ve got that in place, then you will identify then I start mixing in products, customers, margins, and the non financial elements and merge them together to get some kind of value reporting around. How do you improve the business? Once you’ve got that you can then start doing your ratio analysis and saying, where’s the gaps? Yeah. And then once you’ve got the gaps, and with my modelling, for real improvement, you can then say, what if? What if I put the prices up? And the volume goes down by percent? Or what happens if I put the the volumes up and prices up? What’s the impact, and that then gives you cash flow. But also having identified the gaps. I talked about the p to the power of four, which looks at the process, the process mapping the productivity of the people in that process, the proficiency of those people doing the processes, and then the profit and how the profit is generated. And that that then wraps into a good action plan to help the business go through its problems of getting back to normal profitability again. Yeah,
Gene Tunny 28:52
this is great. So you’re crunching the numbers. I like that. Yeah, because a lot of businesses I mean, they’re, you know, they’ve got founders and the founders, obviously doing something, right. Because they managed to, to grow from just being a micro business and they’re starting to, you know, they’re getting sales and they’re taking on employees, and they’re doing what works for them. But in your experience, you think all on their growth on on their journey through those like I often look at that I watch Dave Ramsey stuff. I don’t agree with everything he says, but I think he’s got some good points. I like his framework for the different stages of the business and how they, they start off with being a mum and dad business. So we get his actual terminology. But you know, the idea is you want to go through these different stages of being a trailblazer and then end up at at legacy and all of that. And I’m just thinking there, I mean, we we’re in the journey of being a business should should, should a business owner be thinking of getting a CFO or going you know, moving in If you’re having a bookkeeper or just having an accountant who helps them out with tax,
Andrew Walker 30:03
yeah, so I think I think it’s an that’s not a simple answer that if I hit this turnover, people have this perception I’m doing 20 million, I need to see it depends on a number of things in the business, you know, if you have a very simple business, which is purely trading, urbanna sell, and it’s a simple transaction, do you really need a CFO in your business, because you’re going to bring the CFO in, he’s not going to actually add the value you want. And invariably, he’s going to get bored. And you’ve wasted the the investment of recruiting somebody who then moves on very shortly afterwards, because it’s a simple business. But when you start getting into, for example, manufacturing, and you’ve got bombs, and you’ve got, you know, having to back flush your bombs in terms of understanding what’s happened in the business, then you should be looking for a financial controller in terms of getting into the nuts and bolts of reporting activities in the factory, the number of tonnes, the tonnes use the scrap, what does that bomb, say? Are we producing more scrap than what the bombs? Do? We need to adjust that that affects our price? What about the process of steel Steel’s gone from it? You know, it went up 25% Down again in the last couple of years. And if you didn’t have somebody on the numbers there, you could have lost a lot of money in an organisation.
Gene Tunny 31:19
What was what were you saying bombs? Will you believe material are sorry?
Andrew Walker 31:25
We’re not going to blog, anything but
Gene Tunny 31:29
materials, materials that
Andrew Walker 31:30
you know, and that’s important. And and then when you in again, back to understanding that the lifecycle of a business Yeah, is there is a point when you’ve established yourself, you’ve got a good business, you’ve got a good product, you know, everything’s good, the culture is good. And you want to now do the big the big expansion, that’s when you start thinking, I need a CFO, if I’m going to IPO it, you know, listed or stake other stakeholders in or I want to exit Yeah, you know, that’s when you need them the CFO. So and it’s not around turnover or number of people, it’s around the type of business and how you operate within that business. Yeah.
Gene Tunny 32:09
As someone who works with a lot of businesses. Do you have any thoughts on this whole, you know, the private equity, sort of, you know, that industry, because I’ve had, well, I’ve had a guest on previously who’s over in Rhode Island. And what he does is he’s looking around for smaller businesses that he can come in, and he can take over and then and then sell at a later date improve things. So I’m just wondering, do you have any, do you have any thoughts on that? I mean, like, there’s a lot of, you know, there’s a lot of negativity out there about private equity, there are people sceptical over there are people who accuse private equity investors have been vultures. Any thoughts on private equity at all? Andrew, I
Andrew Walker 32:57
think I think back everything, this is a spectrum of private equity companies. And if I could define it in the, at one end of the scale, they probably private equity, who want to buy a good business, and they can offer their investors a better return. So they don’t actually do anything, they try and buy low, and then they provide a bigger return. So if you, if you’re in high net worth individual, and you’ve got a couple of million, you want to check in with some of your mates, you can buy business, and you’ll probably get a better return than you would with the banks. But there’s obviously risk with that. So you get private equity that fill that space, and then manage the company. And sometimes you do find, you know, private equities, they have it for three or four years, and then they flick it on to another private equity, and it just keeps rolling around in terms of, but what they’re doing is giving their their investors a better return than what they would have got elsewhere. So that’s the one scale. Yeah, he got to the other scale, you get the private equity, who are looking for the roller. So for example, there have been a few good ones like that the vets the greed, CrossFit story, where they went around and rounded up all the small private vets and brought them into a single group got purchasing power, and helped them with their business, streamline their processes, and then IPO that and made a lot of money out of it. So you get to two scales and like everything, there’s good accountants, but I in my presentations, I have the good, the ugly, what’s the good, the bad and the ugly? And in that spectrum, you know, it’s the it’s a wide spectrum of people out there all looking to make some money and it’s how they do it.
Gene Tunny 34:40
Yeah, gotcha. Okay. Okay. Now, what are the big business trends you’re seeing at the moment? Andrew, do you have any thoughts on AI, for example, how that’s impacting Oh,
Andrew Walker 34:52
that’s, uh, I think in my area, I think we’ve got a long way to go. You know, everybody’s got this buzzword and we can all look up chat, GP or PIO, and get a big download of a whole lot of stuff. And I think we smart. But I think in the finance world, we’ve got this great opportunity to actually develop AI. But it’s going to take, you have to teach AI to produce what you want, for example, so analysing businesses, financial businesses, and then using AI, to, to benchmark that business against the local industry, in terms of what’s out there. And the National, and maybe the international share prices, exchange rates, all those things could have a big impact as your business is growing to use AI to, to give you some kind of understanding on what to do within your business. But I think we saw a long way before we get to that. I mean, AI is getting implemented in a lot of the software to be able to do that now and the software that I’m using jet ox, they’ve got a module on AI. And so you know, we, the, the corporate performance models are really starting to introduce that. But I think we slow way off. But it’s going to be like steel, steel, steel belt tires versus Canvas, you know, what’s ever going to happen. And when they crossed, it was almost exponentially he went to steel belt. So I think there’s going to be a point where AI will just really take off. Yeah, so what’s jet ox again, that jet ox is the software I use to do that I’ve used to develop my modelling. So it’s a big corporate performance management software, right, that big corporations are using in terms of producing this new way financials, their dashboards, because it can drill into different systems, financial, non financial, the ERP systems, and pull that data in and then create dashboards for for managers and team leaders and supervisors to see where they’re going. But then it also links it to the financial, so then you can start pulling your financial in and have really good quality ratios around using non financial data and financial data and creating activities around how do I improve the
Gene Tunny 37:07
business? Gotcha. Now this, hopefully, you can answer this, I think you can answer this question because it’s something I’ve always wondered. And I’ve sort of vaguely a sort of a vague understanding of what SAP or SAP is that system, what is it and how does it relate to the jet ox? Okay,
Andrew Walker 37:24
so, yeah, that’s, that’s an interesting question, because it blows open a hole. Right? In terms of, if we start on the other end of the scale, you’ve got my OB, and you’ve got zero and all these packages. And they produce financial results. And then what they’ve done is they’ve linked other applications or apps to create other kinds of things around the financials, the payroll, or CRM packages, Customer Relationship Management packages. And that’s it. It’s a very small thing. S AP is right at the top where they try and do all of that for you in one package. Right? Which makes it really expensive. Yeah, because then you also almost are actually customising the software to suit your business. Yes. And the business has changed. I think in Australia, there’s a lot of small to medium sized businesses and SAP are now coming up with as it was, I don’t know how long it’s been out. But it’s a PB one, which is for smaller businesses. Because I’ve seen there’s an opportunity in the market. But you know, all the software you finding, they can’t cater for everything, you’d have a really good software package that looks after an engineering shop is a cut up so they’d have the nesting of how you cut your, your laser cutter to not only one big sheet of steel, you’d want to nest all the products on once you get maximum use of the steel. And all so that’s been designed by a really intelligent engineer understanding that business Yeah, but he has no idea of financials or raw customer relationship. So then you have these add ons. Yeah, where’s SAP tries to do everything in one raw. Okay, so jet oxen sits on top of those, that software not not SAP, where you’ve got an ERP system, you’ve got Salesforce manager, you’ve got a financial package with sage or BB or QuickBooks or NetSuite, whatever it is, and you can draw it and he’s competing in, in the space of Power BI, which I don’t really write in terms of raw of widget oxes because jeddaks is right up there with some of the top players.
Gene Tunny 39:43
Okay, I’m gonna have to look at jedoch so I haven’t come across it before.
Andrew Walker 39:47
It’s new in Australia. Yeah, um, practice. One of the gold partners of Jeddaks
Gene Tunny 39:53
Oh, great. Yeah. Okay. Yeah, definitely have to check it out. I think what what you’re This discussion is highlighting to me just how challenging it is really, if you’re in a corporation, you’re in a business or any, you know, even an SME, just how challenging it is getting across all of the data or the financial and performance information within your business. And that’s why you need to have those systems and you need someone like yourself or, or a team that can actually drive it and make sure all the data are sort of, you’re getting the data you need, and is producing those reports that are necessary to make the decision so you can move in time to take advantage of the opportunities
Andrew Walker 40:35
that are in that it’s very interesting, because there’s so much data coming at us new skill, in my view, is is how to interpret that data quickly. Yeah, and get it in a succinct format to make decisions. Yeah, and now you get in every way you look, whatever you’re doing, there’s a data recording. When you’re shopping at Coles or woollies, or you know, all that’s happening all the time. And so those suppliers, and those manufacturers and producers are getting all that data and there’s a there’s an opportunity or not an opportunity. But it’s it’s a problem, because you can end up with data overload. Ron and organisation. So you’ve got to have the skill to be saying, what data do I need out of all this data? And how do I best presented to understand what’s happening in a trend? Or and then make decisions on it? Yeah, and just coming back to your previous question, genius, you have all these systems. And what I believe is, you’ve got to create the electronic thread through your business. And that that thread takes every single system and it weaves its way through. And once you get this electronic thread, you’re actually creating a competitive advantage that nobody can steal. If you make a product, people will take the product, they’ll reengineer it, they’ll ship it to an offshore country, and have it manufactured and come in and smash your costs to your selling price and, and take your market. But if you’re a business, and you’ve got an electronic pipeline, that links your front end of the business, the customer end right down to cash in the bank, the inquiry all the way through to cash in the bank. And if you if you work on getting that really efficient, what it does is nobody can steal it, they can steal people out of your organisation, but that could actually creates a really good culture. And it also then what it does, it makes your systems efficient. So you can put more volume through that swelling the belly. Andrew, do you have any? And
Gene Tunny 42:37
I know this is almost an impossible question to answer. But do you have any feeling for what you know what percentage improvement across industries we could get from? You know, just sorting this sort of stuff out? Right? For, you know, among, among businesses out there? Because it sounds like, look, there are a lot of the sounds, it sounds like there’s potentially a lot of inefficiency or a lot of bad processes that that need to be fixed up across businesses in even in advanced economies, such as Australia. I mean, obviously, we’re, we’re probably far ahead of businesses and some other countries, but what’s the what’s Do you have a general feel for that?
Andrew Walker 43:16
Ah, I think in the businesses operating with small to medium, you know, Bologna, 100 million turnover. Every business, I walk into this opportunity, every single and but the problem is, is people don’t recognise that the owners believe the business they’ve created, they’ve developed it, and you’ve got to have a catastrophic event to happen for them to say, I need help. And that’s, you know, where were you then get the introduction into going into these businesses, and then creating the opportunity? I think, in every single business I’ve worked in over the last 1617 years in Australia, I’ve created increased wealth for for the owners, what percentage and how does that relate from, from your point of view of the macro environment? I couldn’t I wouldn’t even ever guess at a time. That’s
Gene Tunny 44:06
okay. It’s one of those very difficult questions to answer. I’ll have to look to the economic literature and see if anyone’s tried to quantify that that recently, because there are all sorts of studies of, of, you know, how far firms are from the world’s best practice, or you know, what they call the efficiency frontier? Yep. So I might go back and look at that literature and see what that says, but just just chatting with you. It occurs to me too. I mean, yeah, there could be some real productivity gains that we could make in our economy. And that gets me thinking. And, you know, if you’re thinking productivity, you probably shouldn’t then government, but is there is there anything government should be doing? Are there any policy levers that should be that could be pulled or changes in In tax or regulatory settings, do you have any thoughts on that? You’ve gotten
Andrew Walker 45:04
into the big macro worlds? Yeah, in terms of taxes and reducing taxes. And, and that’s those are all very complex discussions to bring down into something simple. I think, you know, I said to most of my clients say always bitching about paying too much tax. Yeah, I say to them, You know what, the more tax you paint means you’re more successful. So let’s get away from, you know, worrying about that to focus on your business, and drive your business rather than worrying about tax and regulations and things like that. Yeah,
Gene Tunny 45:35
I think that’s a really good point. Now, just going back to our discussion of the risks, and one of the risks is, you’re not you’re not managing your cash, well, you’re not actually accounting properly for the fact you will owe tax in the future. And so so many businesses get into into trouble like that. And now the ATO our tax, our Australian Taxation Office, they’re chasing our businesses, and they’ve been pretty hard headed. Yeah, really aggressive about it. And then that’s what’s driving up the insolvencies to an extent here,
Andrew Walker 46:06
I think that’s a bit of a lag from the COVID era that people businesses that should have gone, gone to the wall then survived through job keeper, those sorts of things. And but I think we now seen that and we also seen the person insolvency starting to come through they also up a lot higher compared to the previous year. Yeah, I think that’s a hangover from the COVID days. Yeah. But you know, I mean, if you look at what why did why businesses, why did they go insolvent or be put into administration? And I would say, 80 to 90% of the time, it’s management, it’s bad management in the organisation, you’re going to have catastrophic events, major data fails on you. But as management, you would have seen it, it’s a large data. How did you do the risks? What risks did you take? Did you take insurance on it? So? Yeah, I think that yeah, in terms of, of businesses, and risks, and cash, if you’re running your business well, and you can see the margins and you’re getting monthly reporting happening, that is where you actually drive the business. But if you have a bookkeeper who’s been doing the work and is now in that elevated position, they don’t understand the importance of of producing results three or four days after month in and out of interest from Alan Jackson and and if you know Alan Jackson, he used to sit on the reserve, the Australian Reserve Bank, O ra going back, I don’t know 2025 years ago, when I was going through the BTR thing I had to ask the comptroller for Africa for Dunlop, and three days off the mantained i to produce to London, a set of turnover and operating profits for the Dunlop business in Africa. Yeah, in seven days, I had to produce a set of financials three way with the reconciliation waterfall analysis. And by day 10 We were in the boardroom was Alan Jackson and he wasn’t a con man. He was a real driver. He took the business from, I think about 700 million to $3.4 billion and increased operating profit from I think 14% of sales up to 16%. So he drove that business but one of the real principles on that was monthly financial reporting as quickly as possible and if you didn’t get it I tell you the phone was red hot. Yeah,
Gene Tunny 48:25
so just what was the abbreviation BTR a
Andrew Walker 48:29
Bter? BT and Alex I think Australia as BT in the UK, the listing was BT RPL and yeah, so um, Dunlop. They had a lot of businesses. The African element was, was all around the Dunlop products Slazenger, golf balls, cricket pads, rubber conveyors and all that sort of thing. We used to call it blood tears and repression. And Alan Jackson was, yeah, Alan
Gene Tunny 48:56
Jackson was the CEO to look at look it up. And that it was that an operating profit? Increase? You’re talking about like it sounded. There was hugely impressive. Do you know how that roughly what he did? I mean, it was at all he went on acquisitions.
Andrew Walker 49:11
Right. And he grew the business through acquisitions. But then there was a very strong once I’ve taken over a business, I had a very clear plan. Yeah, this is what’s going to happen. That done the due diligence properly, okay, people that needed to go left on the day, they had the team that were taking over stepping in. And then I had the financial performance, the last three years driven to their standard, and you were expected by the next month to be reporting in their level and they reviewed him and he’s his CFO, Kathleen O’Donovan. Yeah, they used to just keep going around the world. All the locations, so we, we, we’d seem Tinder is regularly or every month in and they would be going through our financials because they had standard throughout the world. So yeah, say the financials in a When I was running the Zimbabwean business we had, we had, we had a coffin business in Zimbabwe, it was prospering because of the, the Isaac. But we had a set of financials, which would have been the same as a company in Coventry, producing CV joints. And that’s how they drive the business. And that’s why finance departments and good financial people in your organisation are important to take it to the next level.
Gene Tunny 50:26
Yeah, it sounds like they were very hands on. You said they were travelling and visiting the businesses. Yeah. Yeah. That’s fascinating. Yeah, not to have to look, look more into that. Anything else we’ve we’ve missed Andrew. I mean, I’ve enjoyed learning about all of this. And it’s, it’s made me think more about the the, you know, the importance of understanding your what is driving profitability, and really getting across that. And then all of the data, the the number crunching that needs to be done, and
Andrew Walker 50:57
let’s come in, as I’ve just said, every month, you’ve got to be reviewing that every month, because people they get one month, and then it just wanes, going to have that, that, that good discipline, and routine happening in your business to then take action to make sure you you’re taking the action in a timely manner. The other thing I think, is, what I found is a lot of businesses don’t actually look at cash flow. And then try and project it forward and come across a lot of financial people, it’s too hard to forecast your cash. Well, no, you do the best you’ve got with the current information. And then you keep tweaking it. And every time you’re doing that you’re getting better at it. And I always say to my clients, when I come on board with them, let’s get the cash flow, three months, six months ahead. So we can know in three or four months time we’re going to hit a problem. Yeah, you can deal with it now. Other discount your products, get cash in or, or have a chat to the ATO and try and extend your terms of payment or whatever, or talk to the landlord. There’s lots of ways to manage your cash and that seems to be lacking. Yeah.
Gene Tunny 52:01
I mean, I do that myself in my business. Just because I’ve learned what one I’ve learned from experience, it’s important to do it and, and to we also did it in in government in Treasury because we needed to make sure that the the Australian Government had enough money, like day to day in the, in the official public account, the Reserve Bank, so the the team at the Australian Office of Financial Management used to do a detailed daily cash forecast for the Australian Government. And yeah, they, you know, they managed to do it. And, you know, the Australian Government is being hit by all sorts of shocks all the time. So, yeah, I think the Australian government can do it, your own small business can do it. That’s a lot less complicated than the Australian Government. I’m
Andrew Walker 52:45
sure it is. But yeah, but that’s a key element of of understanding your business. And that’s from the finance department.
Gene Tunny 52:51
Yeah, absolutely. Okay, Andrew, this has been terrific. Any anything? We’ve missed anything else you’d like to add?
Andrew Walker 52:57
Um, no, not really. I think I mean, there’s a lot of topics we could feel like talking down going down different elements of this. But yeah, and I think for business now is, you know, if we look at it, look at your finance department. And I’ve been doing some, some presentations to different groups around the blank box, opening the financial blank. And I get, I get the CEOs that come to the thing, the presentation to score the finance departments in two different ways that gut feel, yeah. And then score on performance around management accounts. How long do they take? Budgeting, forecasting? zero based budget? All those things? Yeah. And I think I’ve probably, I’ve just I’ve had present, I’ve done presentations to probably about, it must be in excess of a billion dollars of companies all added up an annual turnover. And, you know, What surprises me is it’s 50%, the satisfaction ratio of the CEO, and his finance department is a 50% level. That is, that is frightening.
Gene Tunny 54:06
Yeah, at the moment that the current labour for you
Andrew Walker 54:09
Yeah. And then I go through the whole process with them. And then, and then are related back. How much are you paying these people? Yeah, and you only have 50%. And it’s funny, I said to the one guy said, If you bought if you bought your fancy Maserati, yeah. And then any came was one wheel, how would you feel about it? So, you know, you’ve rented your finance department at 50% value producing the car with two wheels, you know, and so, and I think that’s where I have a problem. It’s my own profession, you know, but I think there’s a really there’s no real standard in in in how financial departments should perform. You look at it manufacturing, they have to produce the product with quality, service with quality or the report with quality. When it comes to the finance department. The scale of a printout out of the system, which is used is used There’s a chocolate via God to a proper set of financials. It is just so broad and a lot of CEOs don’t actually understand it. And so I spent a lot of time on doing presentations to make people aware. What should a good financial department deliver? Okay,
Gene Tunny 55:15
I want to put some links into if there are any presentations you’ve got in the public domain, Andrew, I can put links to them. And I’ll also put a glossary and we’ve covered some yeah, there’s some interesting new terms the the delivery in full on time the die fight. I love that. I’m going to start using that. And the bomb the vom the bill of materials. That’s a good one, too. Very good. Okay. Henry Walker. Thanks so much for your time. I really enjoyed the conversation.
Andrew Walker 55:44
Yeah, that was good to be a gene and always happy to come back and maybe explore a sliver of dollars because there’s a lot of detail in this. Absolutely.
Gene Tunny 55:52
I think I think we might have to do that. So Andrew again, thanks so much. Yeah, thank you, Rod. Oh, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
56:46
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
Sir David Hendry, the renowned British econometrician, talks to hosts Gene Tunny and Tim Hughes about the state of economic forecasting and the transition to net zero greenhouse gas emissions. Among other things, Sir David talks about how to avoid major economic forecasting failures (e.g. UK productivity), forecasting global temperatures after volcanic eruptions, and the role of nuclear energy in the net zero transition. Sir David is currently Deputy Director of the Climate Econometrics group at Oxford. Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.
Sir David F. Hendry is Deputy Director, Climate Econometrics (formerly Programme for Economic Modelling), Institute for New Economic Thinking at the Oxford Martin School and of Climate Econometrics and Senior Research Fellow, Nuffield College, Oxford University. He was previously Professor of Economics at Oxford 1982–2018, Professor of Econometrics at LSE and a Leverhulme Personal Research Professor of Economics, Oxford 1995-2000. He was Knighted in 2009; is an Honorary Vice-President and past President, Royal Economic Society; Fellow, British Academy, Royal Society of Edinburgh, Econometric Society, Academy of Social Sciences, Econometric Reviews and Journal of Econometrics; Foreign Honorary Member, American Economic Association and American Academy of Arts and Sciences; Honorary Fellow, International Institute of Forecasters and Founding Fellow, International Association for Applied Econometrics. He has received eight Honorary Doctorates, a Lifetime Achievement Award from the ESRC, and the Guy Medal in Bronze from the Royal Statistical Society. The ISI lists him as one of the world’s 200 most cited economists, he is a Thomson Reuters Citation Laureate, and has published more than 200 papers and 25 books on econometric methods, theory, modelling, and history; computing; empirical economics; and forecasting.
What’s covered in EP198
Conversation with Sir David:
[00:02:27] Economic forecasting: are we any better at it?
Transcript: Sir David Hendry on economic forecasting & the net zero transition – EP198
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It has also been looked over by a human, Tim Hughes from Adept Economics, to pick out the bits that otters might miss due to their tiny ears and loud splashing. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:06
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show.
Hello, thanks for tuning into the show. In this episode, Tim Hughes and I chat with the legendary British econometrician, Sir David Hendry. We talk with Sir David about the state of economic forecasting, and about the transition to net zero greenhouse gas emissions. Sir David Hendry is co director of Climate Econometrics and Senior Research Fellow at Nuffield College, Oxford. Previously, he was Professor of Economics at Oxford, and before that he was Professor of Econometrics at the London School of Economics. After the interview with Sir David, Tim and I go over our main takeaways from the conversation. Okay, let’s get into the episode. I hope you enjoy our conversation with Sir David Hendry.
Gene Tunny 01:26
Sir David Hendry, welcome to the programme.
David Hendry 01:31
Thank you very much, Gene. Thanks for inviting me.
Gene Tunny 01:34
Oh, of course. It’s a pleasure to have you on to talk about forecasting. So forecasting’s something that Tim and I have been thinking a lot about. And we’ve chatted with Warren Hatch who’s a super forecaster with I’ve also spoken with John Kay, about radical uncertainty and how you deal with that. And I’ve also read your book on forecasting, the one with Jennifer Castle, and Michael Clements, and I thought that was very good. And who better to, to have on to talk about forecasting than someone who has really transformed forecasting and economics, someone who’s had a major impact on forecasting? So to begin with, David, I’d like to ask, how has economic forecasting developed over your career? To what extent has it improved? To what extent are there still areas for improvement? Could you talk to us about that, please?
David Hendry 02:34
So Gene, I don’t think it has improved. I think technology has but the actual practice hasn’t. The time that I got really interested in forecasting was acting for the select committee of parliament that was looking into economic forecasting, after the debacle of Nigel Lawson’s budget and then crashing the economy in the early 1990s. And what I discovered, and acting for them as an advisor, is that 90% of the evidence he got was people actually forecasting and only 10% was looking at how you should forecast, what should you do, what goes wrong when you forecast with no analysis at all? So we started a long programme of analysing what can go wrong in forecasting and why. And once you know that, what can you do about it? Well, obviously, there’s nothing you can do about things that are unpredictable. Right, so the pandemic, unpredictable, forecasters shouldn’t kick themselves because you’ve got it completely wrong forecasting December 2019, for 2020, to discover that it’s vastly different. I mean, the biggest ever fall in GDP in Britain, you couldn’t possibly have forecasted that, that’s not a problem. And we can’t do that, it’s you can start to improve the forecast as you go through 2020. and realise that things are going badly wrong, but you can’t forecast in advance. So we isolated two key features that go wrong in forecasting. One is unpredictable events like that, that shift the data. So data is going along, and then either shifts up sharply, like inflation, or shifts down sharply, like output. But once it has changed, you can do a great deal about it. Some methods now don’t work. And some methods do work. And the methods that don’t work are the methods that stick to what went on before. So they carry on at the same level. And that’s completely wrong relative to the new level. So you have to have very adaptable methods that jump as soon as the forecast has gone badly wrong. You use methods to try to adjust for that. We call them robust methods. Right? So they’re after the shock to GDP. They’re robust. So the Office of Budget Responsibility in Britain, forecasts productivity per decade, completely wrongly, every year, they were wrong for 10 years, if they’d used our methods of adapting because productivity had been growing at about 1.7% per annum up to 2012, and suddenly it stopped, we don’t know why it stopped. But it’s come back to the levels that we had in the 19th century. Point seven. But if you keep forecasting 1.7, we just get massively wrong forecasts all the time, very bad advice for governments. And our methods would have adjusted to that within a year, saying, Okay, it’s changed, it may change back. But meantime, you better forecast along this direction. So the actual, if you like, the forecast errors that people make today are very similar in size to the kind that were being made in the 1960s.
Gene Tunny 05:56
Right. Yeah, that’s a that’s a shame. I should I forgot to introduce Tim. Tim, do you have any questions for Sir David on that?
Tim Hughes 06:04
No, it’s, it’s interesting. I mean, this isn’t my level of expertise. I’m here as the layman in this partnership with Gene. So I tend to look at things from a macro view and more from a guy on the street sort of perspective. But I’m really interested in that when you say that, well, for instance, it hasn’t changed since since the 60s. What’s the delay in the take up of these modelling systems for government?
David Hendry 06:27
Well, one of the reasons it hasn’t changed is that the frequency of large, unpredictable events hasn’t changed. And they’re very common and much more common than people realise, except to see the pandemic has been, Oh, quite unusual. Of course, we’ve had lots of pandemics, some of them happened like SARS too, not to go anywhere. Others like the COVID have gone everywhere. Inflation in Britain in the 1970s. It’s very similar to what it is today. And for very similar reasons. Now, I think a lot of forecasting that you hear about comes from central banks. And that’s the kind of forecasts we can analyse because they’re made to publish it. We don’t see the forecasts within many major institutions like JP Morgan, or Citibank, or whatever, they tend to keep them to themselves unless they do really well, in which case, they tell you oh, we were doing really well. But when you look at Central Banks, say we take the Bank of England as a paradigm, their model collapsed with the financial crisis, it just fell apart, and they said it fell apart. So we started to build a new one, we pointed out to them why it had fallen apart. They’re using a method of mathematical analysis that works fine if things don’t change, but becomes like navigating around the globe using Euclidean geometry when things do change, that just, it just doesn’t apply. And its widespread use has been a disaster in my view, for macroeconomics, and is the reason so much of it has gone wrong, because it assumes that the method that these models are built on assumes there are no sudden, unexpected large changes. Whenever they occur, the models fall apart. And we had a letter recently in the Times saying the bank should try testing their models from the 1970s. And they would find it’s a shambles. It doesn’t work at all. Because the 1970s in Britain was filled with crises, 3 day weeks, IMF coming in, interest at 25%, inflation, etc. And their model just wouldn’t cope with that. And we’re now in is not quite such a bad situation, but we’re now in a similar sort of situation where a wage price spiral is kicking in, these models don’t have wage price spirals. They didn’t allow for the fact that people had saved a great deal during the pandemic, because they couldn’t spend it wasn’t, it was forced saving if you like, and as soon as the pandemic ended they started spending, the supply side had improved to meet this high level of expenditure. So of course, you have all these factors coming and they’re not in their model. So naturally, the model was A they said inflation wouldn’t go up and B they said when it did go up it would be transitory, whereas we were saying, it will go up and it will not be transitory, it will be very persistent and very hard to dampen down.
Gene Tunny 09:24
Right. So this is a letter in the Times I’ll have to have a look for that. That sounds interesting. And it’s a bit of a concern that the Bank of England hasn’t improved its, it doesn’t sound like it’s improved its models very much at all, because in 2010, so you gave a talk to the Institute for New Economic Thinking, and you were talking about the problems with the models that central banks were using. And this was in your conclusion, you said that “there are huge costs to underspecified models and I think the financial crisis is partly due to central banks having very badly under-specified models in their repertoire.” Would you be able to explain what what you meant by that? Is that what you’re talking about here? They’re not allowing for structural breaks. But are there also are there variables they’re not including? Could you just unpack that a bit, please?
David Hendry 10:16
Yeah, there are variables they’re not including and often including variables in the wrong way. So for example, the Bank of England includes wealth. Now some wealth is expendable, like your house, some wealth is potentially spendable like money invested in stock markets and bond markets. In some it’s very spendable, which we call cash, deposits and demand at financial institutions. And it makes a huge difference, to break these up, because wealth itself can change a lot but it doesn’t change expenditure because house prices go up, or house prices go down. But it can also change a little bit and hugely changes expenditures because people run out of money, they have to start borrowing, and they haven’t got time to sell their house or the bond markets in disarray. And financial markets have fallen hugely, and you don’t want to make big losses. So you need to think very carefully about how you include variables in models, as well as which variables to include in models. I was referring to the fact that the housing models in the US when the financial crisis started, were very weak, they didn’t cover all the aspects that that matter, because in some States, if your house price falls greatly, and leads to a large indebtedness, if it was sold, you can just hand back your keys and walk away. You can’t do that in other States. And the subprime crisis generated articles, even from central banks, saying that it’s really important to get poor people onto the housing market, because that’s where how you build that wealth, of course that led to all sorts of speculation, and then house prices crashed. And that’s poor people who end up suffering most and we got a very bad financial crisis. But you guys didn’t have it. Right Australia avoided it, because it hadn’t got engaged in quite such nebulous activities as the AAA assets that were worth nothing.
Gene Tunny 12:16
Yeah, yeah, we avoided it. I mean, partly because of mining. And then the Treasury and the government here, they would say that they had a timely fiscal policy response. I mean, there’s debate about the extent to which that was relevant. But yeah, we were we were lucky. And maybe we hadn’t had as much crazy financial activity as in the States and Britain. We’ve got our regulators too. So yeah, a variety of reasons. But yeah, that’s, it’s fascinating.
David Hendry 12:46
I was gonna say, the way macro economics is taught in almost all major universities around the world still relies on this approach of believing agents optimise across time into the future. And you can’t do that in a world in which you suddenly get big shifts, right? You’re what looked optimal one day becomes a disaster the next, for example, Royal Bank of Scotland trying to buy this Dutch Bank looked optimal to them in the state of the world before the financial crisis and did become an absolute massive disaster after it. And that isn’t something that’s taught in macroeconomics courses that I know off.
Gene Tunny 13:29
Yeah. Yeah, unfortunately, a lot of the macros become very mathematical. And you’ve got all of these forward looking models, these Ramsey type models, and yeah, but I wonder about the just how applicable, they are. So good point. Can I ask you about your methodology David? So you’re famous for having promoted this general to specific methodology, if I’m getting that right. Could you just explain roughly what that is and how its implemented and what the modern implementation of it is? I mean, you’ve got this automatic forecasting system. Could you tell us a bit about that, please.
David Hendry 14:11
The whole idea started in the 1970s, when it was quite clear that the then big models in the US and Britain didn’t really incorporate enough information. And if any, if you leave a variable out of a model that matters, say you didn’t include housing in a macro model, and suddenly you get a big change in house prices, the model will go wrong, because it should be, housing should be in the model, and it’s not there, and it shifts and that then shifts the reality relative to the model. So it became clear you needed to think very hard about all the things that might matter. And that then required you to put statistical method that could discriminate between what does matter, and what you thought might matter but does not matter. And so we had this paper in the mid 70s, on the consumption function in Britain, showing that you could explain everybody else’s consumption function failures by a more general consumption function that pointed out why they went wrong. And that led us to develop this general to specific as a very general approach. Now, it evolved greatly in terms of, as we realise, more and more the importance of shifts and outliers in forecasting, we began to develop these methods, which at first, I have to say were greeted with not scepticism but total disbelief that you could do it. So that to take the basic idea. Say you’ve got a relatively short time series that’s got 10 observations. And you think that within those 10, there might be a discrepant observation, somebody wrote down 10, when he meant one, right? You just fit the model to it, or it’ll go very badly wrong. So what we do is we create an indicator variable for every observation. So it’s one for that observation and zero elsewhere. So you get 10 of them. And you put them in in big blocks, say five, and then the other five, and they won’t do anything, if there is no shift, but they’ll pick up the shift when it happens. And we call this indicator saturation, because you put in as many of these indicators as observations. Now why would anyone think of doing that? Well, it was serendipitous. I was asked to participate in an experiment in econometrics, to model food demand in the United States, from 1929, which isn’t a great date to start, any time see, through to 1986. And I looked at what everybody had done, and they had all thrown away the data before 1946, they couldn’t model it. So I built a model of it and looked what had gone wrong in the interwar period, and discovered there were two gigantic outliers in I think, 1932 and 33 but don’t guarantee that it could have been, but round about that period. And Mary Morgan kindly went to the archives and discovered, guess what, the US had a food programme? Well, will a food programme affect the demand for food, you bet it will. So I put in indicators for those observations and immediately got a very good model for the whole period, for the period up to 1946. So then I thought, right, let’s fit the cost period, including the early one. But we’ll put in indicators for all the observations, which is the kind of forecast test and found the Korean War I think had one big outlier, but otherwise, it was fine. And then about a year later, thought that’s funny, I had put in indicators for every observation. All the ones for the pre war period and all the ones for the post war period. And it had worked, I got the best model of anybody. So I started talking to Soren Johansen, a famous econometrician statistician, he said, “You’re nuts. You can’t do that!” And about a month later, he emailed to say, “Yeah, I think you can do that and I think I know how to analyse it,” which because if you don’t analyse it in economics, they just ignore it. And so we published several papers showing detailed analytics of why it would work for impulses, we then extended that to steps and then trends. So we can pick up trend breaks, step breaks etc. So for our 10 observations, we might end up with 40 variables. Most statisticians look at you, you’re nuts. But actually, you can show it will work. Because if there’s no break, no trend, they’ll all disappear. If there’s no step shift, they’ll all disappear. There’s only one outlier, you’ll be left with one outlier. And that’s it. So that’s how we do general to specific now. And that’s why you need automatic modelling. Because a human can’t do that. The number of possible things is far, far too big. The computer programme can of course, do it in seconds, at worst, maybe minutes if it’s a huge data set, because it’s got many, many things to look across.
Tim Hughes 19:27
Actually, this probably feeds into one of my questions for you, David, which was, you mentioned about the modelling and the mathematics, and the current uptick in artificial intelligence, in AI, is that something that has made a big difference with the work that you do?
David Hendry 19:45
Now our programme is a sort of AI programme date back a long way. Because it’s experimenting with everything. It’s a programme that’s designed for data that keep changing. Most AI programmes are not. Most AI, it takes all the cases and trains the computer to identify things in those cases. But if the cases suddenly change, that’s not going to work. And so AI has itself, the way people have used, it has not made a big impact on forecasting yet. They have to adapt AI to learn from the data, and be ready for it to be adaptable into the future in a way that if you were trying to teach a programme to identify measles, you probably would just take all the cases of measles and the programme would be able eventually to look at the spots and say, Yeah, that’s measles. But if Measles can suddenly evolve, as say the pandemic did, what you’re trying to pick up by AI would no longer be relevant. It would look different, and AI would misclassify. So AI has got to be hugely changed to be relevant for forecasting, which is about a changing world. We’ve got climate change, we’ve got pandemics, we’ve got wars, we’ve got crises, we’ve got inflation, we’ve got changing population levels, etc, etc. Unless it can adapt to that it won’t be useful in forecasting.
Tim Hughes 21:15
In your view, do you think that that is quite likely that AI will get to the point where it will be more predictive and not just reactive?
David Hendry 21:22
Well, we’ve shown you can do it, ours is very simple AI, it’s nothing like the kind of complicated neural networks that are being used in some areas. But it does show that you can do it for forecasting, and it does matter. And in the M4 Forecasting competition, which was run from Melbourne, the AI ones or machine learning, as they were then called, did not do terribly well. We came seventh in our very simple one. And and it turned out that we spent about a 50th of the time that most of the other teams did.
Gene Tunny 21:57
Was this of a motorway was it was at the M4 motorway?
David Hendry 22:01
no no. M for Makridakis fourth forecasting competition. The M four we’re now at five. It’s currently ongoing. Makridakis is a Greek forecaster, who decided the only way to improve forecasting is to find what worked. So he asked people, here’s 1000 time series, we’re not going to tell you what they are, model them, and send us your forecasts for the next 10, 20, 30 observations. we’ll analyse those and see who did best. So at the M4 there was 100,000 time series to model. And you then have to forecast I think, up to 20 years ahead for some of them. And you’ve to send in all your forecasts. And they then worked out who did best and got closest to the actual numbers in the future. Actually Uber did, Uber won the competition, Uber, yeah, the car hire people got algorithms of the kind that could be applied to forecasting. But what they did, we think was accidentally wrong, that they looked across, say, nobody knew what the time series were. But it does turn out that some of them were, say, GNP from 1950 to 1980, and somewhere from 1990 to 2010. Right. Now, they looked across, do some series help us in forecasting other series. And we think they actually included the future of the series they were to forecast in the, seeing if these series helped it, which is why they forecast much better, because we’ve mimicked their method, when all the series are completely independent, and it doesn’t help. So they had to be doing something like that accidentally, I don’t think they realise that, some of the series where the future of others of the series…
Gene Tunny 24:00
Okay, yeah. Can I ask you a question that’s related to that? It just reminded me, because you were saying that they don’t tell you what the data series are. Now. There’s this debate about, well, to what extent do you use theory and you’re modelling, you know, theory driven versus data driven, is it the case that you can get a reasonably good forecast without any theory whatsoever or without any understanding of what the underlying what the data are actually measuring? Or do you need theory? How do you think about the role of theory in your modelling? David?
David Hendry 24:33
Well, when we were forecasting week ahead Covid deaths and cases in the UK, the model only used the past data. And for the first six weeks we were by far the most accurate forecasters relative to epidemiologists with their big models and taking account of whether, you met people who had it and all the rest of it, and that’s because their models needed about 10, 12 weeks of data before they even began to be useful, whereas we could forecast immediately without any theory. I mean, I understand the big models and why they work, but we thought you can’t use that. And it’s because the way COVID hit, it did big jumps, measured on very few cases. And suddenly, like Bergamo, you had 50 people dying in a day, right? And so you get these big jumps and our methods adapt rapidly. So in that area, you could do extremely good modelling without theory. But when it comes to economics, how many variables are there? 5 trillion, possibly in the economy, if you think of everything that’s going on, so you have to have some theories and say, well, most of those don’t matter. We just can’t deal with that. So we use a lot of theory in our models, but we embed it in the general. So say you have a theory, let’s take a very simple theory that only income causes consumption, consumers spend their income and that’s it. So consumption is related to income, period. Okay, we keep that and embed that within a model in which things like well, maybe interest rates matter, maybe wealth, maybe liquidity, maybe, etc, etc, etc, matter. But when you’re searching, you don’t search over the relationship between consumption and income, you always keep it there. And if it doesn’t matter, then it will turn out to have a very small coefficient, and you can decide to drop it in the end. But if it does matter, and it’s the only thing that matters actually our method will give you the same answer as your theory model. So we embed theory in such a way that if it’s correct, that’s what you will get. And if it’s wrong, you’ll get a better model. So it’s both theory driven and data driven.
Gene Tunny 26:53
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 27:27
Now back to the show.
And so you start off with a very general specification, lots of data in your database, lots of variables, if I’m getting this right, and then you allow for the potential potentially all of these structural breaks things where things go a bit crazy, you jump up to a new level, like during the pandemic or, or whenever, and we we dropped down from the trend growth path we were on maybe we were cycling around it and suddenly we’re somewhere we’re in this hole and so you’ve got models that can adjust for that sort of thing is that if a fair way of thinking about it,
David Hendry 28:05
Yes, it’s post, yeah. Yes. Once it’s happened, then the model will pick it up. So quite a good example that might intrigue you is finding out where all the volcanic eruptions occurred over the last 1000 years. And when the when one of my colleagues gave a paper in our methods at our General Environmental Conference, all the volcanologists were intrigued and asked us can you use these adaptive methods to show where volcanoes were and measure how they work? Well, the answer is yes, we adapt our methods instead of them being one zero zero. They’re kind of like a V. Because when a volcano erupts, the temperature drops immediately. But it then recovers roughly half a half a half a half of what’s left. So the V shape picks that up. So we found all the volcanoes from 1200 AD in the data set of tree ring growth dendrochronology. And the key thing about that Gene is as soon as you’ve got the first observation of the volcano erupting and the drop in temperature, you can very accurately forecast all the remaining observations to the recovery, by having this V shaped go half a half a half. And we showed we could forecast, okay, forecasting after a volcano in 1650 isn’t all that interesting today, but it tells you that the next time we get a world explosive forecast like Tambora or Krakatoa, we will be able to tell the world after it’s stopped erupting, how quickly the temperature will recover to the previous level. It also lets us adjust the so called baseline temperatures that IPCC use. That in fact have been several quite big volcanoes that have dropped the temperature a little bit for a few years, and that actually means that they’re cheating by using a slightly improper average over the periods they’ve picked, as they shouldn’t include the volcanic eruption, right? Because that’s when you should use the natural level that had been over that period overall, if that makes sense.
Gene Tunny 30:22
Yeah, that’s fascinating. And so your, so is that an application of your method? Or are you, the point you’re making about the volcanoes there? Or are you saying that you can apply some theory to get a better forecast? I’m just trying to understand
David Hendry 30:36
It’s our methods purely. And it’s just the knowledge that when volcanoes erupt, the temperature falls, but it goes back again. So the question is, what form do you use for that? We just invented one that says V shape, and then we put in a V for so, it’s just over, I think we had about 900 observations. So we’ve put in 900 of these Vs in big blocks, but it only picks up a significant g if there was a Volcanic Volcanic eruption, right, because otherwise, it doesn’t help fit the model. So it then just picks up all the volcanic eruptions, and the volcanologists started using this method, we’ve done one to get a new archive of volcanic eruptions since zero, like 2000 years ago,
Tim Hughes 31:24
Actually this probably leads us on, do you have anymore questions Gene?
Gene Tunny 31:30
No not at the moment, go ahead Tim.
Tim Hughes 31:33
David, I was gonna ask you about climate econometrics. So you’ve written a book on that with Dr. Jennifer Castle. So I was interested to see exactly what climate econometrics is, and how it might be able to help us tackle climate change.
David Hendry 31:44
Yes, climate change is caused by our economic behaviour. All our methods were developed for modelling economics. So it would be quite unsurprising that they would work from modelling climate change, which is due to economic behaviour, CO2 emissions, and nitrous oxide emissions, the way we travel, the way we live, the way we eat, the way we warm our houses, etc. All these things are economic decisions. And so if the methods work for the economic behaviour, they’ll work for explaining climate, they’ll actually also work for claiming, explaining things like ice ages, even though there’s no humans around then, because they, the kind of dynamics of ice ages how the amount of co2 in the atmosphere, the amount of past sunlight falling on the Earth, that’s created the temperature, the amount of ice that’s around, etc. All of these carry forward into the future and there’s really good data on ice ages, I mean, 800,000 years of pretty accurate data and how it evolved. And we can fit our models to that, again, very general. Now, why would you want to put in indicators? Well, of course, there’s often a lot of dust in the atmosphere. And dust falling on ice turns it black, which turns up the amount of heat that absorbs. So if you have a period of massive volcanism, which does occur, I mean, often you can have 50 years of vulcanism puts up so much dust, it actually changes the pattern, and you can pick that up, and the sudden jumps in temperature that were unexpected, for example. So it can be applied to all these issues. We’ve been applying it to modelling ‘How well is the UK doing in getting to net zero?’ Now we were at a particular point that we had very good data on all the ingredients that lead to CO2 emissions, the amount of coal, which was huge in the 19th century and up to about 1970 was pretty large in Britain, but then began to drop dramatically, because it became inefficient relative to other sources, but also because it was banned in household fires. When you were not allowed to have fires based in smoky coal because smoke, so you get the demand for coal falling, and that led to the discovery of natural gas in the North Sea. Prior to that the gas system was coal gas, which required you to burn coal to get the gas but it’s very inefficient so that got rid of coal and natural gas is much more efficient. And oil was throughout beginning to replace the use of coal in many industries particular. And then in 2008, the government banned it from being used to produce electricity. And that’s the death knell for coal in Britain’s there’s almost none used nowadays. Now, 2008 is something The Climate Change Act of 2008 amazes many people, both parties unanimously voted for it as did the Lib Dems is completely we need this, let’s do it. And you get a huge, very rapid drop in the amount of CO2 emissions in the UK. Now Britain’s been moving towards a service economy from a manufacturing one. But it hasn’t been doing that to get rid of CO2. It’s been doing that because World Trade Organisation rules meant you couldn’t put extra taxes on people who are cheating in the way they were pricing their products. And so they killed off a lot of British industry. So I don’t accept that the offshoring has anything to do with climate change and claim that our domestic reductions. So Britain’s come down from 12 tonnes per person per year to four and a half tonnes per person per year over that period, which is a very dramatic reduction. America is still at 15. So it’s still above the highest it ever was in Britain. And one of the explanations we came across recently is that in Britain, cars went about 20 miles to the gallon in 1920. Now on average, they’re going 55. In America, they went about 20 to the gallon. And now they’re going about 20 to the gallon. And there’s many, many more cars, and they’re driving much further. So they’re consuming vastly more oil, and therefore gasoline. And therefore pumping out much more CO2, nitrous oxide, particulate matters, etc. They’ve had no efficiency gain, whatever, because they’ve gone for these bigger SUVs, much heavier, much bigger engines and petrol, gasoline has never been taxed in the US, whereas in Britain, the tax is about two thirds of the price of a pump.
Tim Hughes 36:54
Yeah, it’s expensive. Yeah, it’s a lot.
David Hendry 36:57
Yeah, it hasn’t discouraged people from driving. Right, people are still driving, there more and more kilometres on aggregate in Britain driven every year despite these high taxes and gasoline is one of my reasons for believing that carbon taxes will not by themselves solve the climate change problem. We need technology we need to adapt until we’ve written several papers, proposing a system of what we call five sensitive intervention points. That can be used to exploit how people behave without trying to change their behaviour, but to make them do things that will then be climate optimal. So for example, cars in Britain last nine to ten years on average, and then become obsolescent. So instead of buying another internal combustion engine car, price electric cars so that they automatically move over and buy an electric car. And if we did that, over the next 30 years, we’d end up with every car being electric, and nobody having suffered and have got the new car that they wanted at each point in time, but switching over gradually. But that requires you to be providing more electricity all the time to meet this, which requires upgrading the grid and installing more wind farms or solar cells, and maybe more small nuclear reactors and perhaps investing more in fusion in the hopes that the current breakthroughs can be made useful for society before 2050, and so on. And the paper tries to spell out how all these steps interact all the way down, clean right down to farming, how we get rid of the massive amounts of nitrous oxide, methane and even CO2 to come out to farming. That’s a huge concern in New Zealand, your neighbouring country, poor farmers, they’re objecting to fart tax. I don’t blame them. I mean, so how can they deal with it? Right? It’s, it’s not like you can deal with the tax when cars were getting more efficient when they’re driving less or getting an electric car. They need to think of the technology that will reduce methane emissions from animals. I don’t know if you know that there’s an island off Orkney called North Rolandsay, where the sheep are not allowed off the Shore, there’s a wall around the island and all the sheep are kept on the shore, and they eat seaweed. But methane…
Tim Hughes 39:25
Yeah, I heard about this recently. And because I was going to say I agree with what you say about technology, making these changes. So you know, rather than forcing people’s habits to change or you know, doing something drastic with our food chain, etc, the technology will contribute towards those changes. And yes, I saw that the seaweed or additives made from the seaweed could be one of the solutions for for methane. So just by adding it to the food. Obviously, it’s early days to see if that may or may not work on scale. But it’s encouraging It is encouraging to see those breakthroughs.
David Hendry 40:02
I think the breakthrough that’s needed is to synthesise the chemical. that does it. Because I don’t think you can grow enough seaweed to feed all the world’s cattle, sheep, goats, etc. I think that’s not on. But knowing that asparagopsis taxiformis, which is the one that seems to be best for stopping the thermogenic reactions within animals, it could be synthesised in the way that aspirin was taken from willow trees, and then Bayer worked out how to synthesise it. And I think these these things are possible. So yeah, I mean, our paper suggests that all of it is possible. Some of it needs subsidies, I don’t think tax is the right way to do it. Because we saw the uprising in France from the yellow vests. And that’s happened in Sweden, people object to their lifestyle being disturbed. This doesn’t disturb their lifestyle. It just says, oh, you know, you’d be better off if you do this. And then you can keep manufacturing going making cars but electric cars and wind turbines and solar cells and heat pumps and so on. All of it’s out there. And the thing that I do emphasise when I meet sceptics is by the end of the 19th century, we had cars that were electric with rechargeable batteries that could go up to 50 miles between recharges. We had solar cells, on roofs, we had wind turbines that were being used on farms, we knew that climate change was caused by excess CO2. And everything was in place for an all electric society, we knew how to generate it from hydro power, from wind power from solar power. But then the Americans discovered oil and the internal combustion engine. And that
Tim Hughes 41:54
So that technology was there at the end of the 19th century. You’re saying?
David Hendry 41:57
At the end of the 19th century, all of it was there. And we trace who invented it, how they invented it, how it developed? Yep, it was all there. Not LED lighting, that’s an important, more recent development.
Gene Tunny 42:12
Yes. Can I ask about that? That paper? I’ll have to look it up. It sounds fascinating. So have you you’re you’ve done modelling, have you of this path to net zero for Britain? Is that what you’re saying?
David Hendry 42:20
That’s what we’re saying yes
Gene Tunny 42:24
Okay. And yeah, it’s feasible. If there’s this technology, some technology shifts, technological improvements, but also that there may need to be some subsidies for electric vehicles, I think, was that what you were…
David Hendry 42:37
For the electric vehicles, but also for the grid. You need a massively improved grid, both because there’s vastly more electricity, but it’s got to be more resilient to climate change, because climate change is going to happen. Irrespective, even if we managed to reduce everywhere, it’s still going to carry on for a long time, because the oceans and the air have got to calibrate the temperature. And that takes a long, long time to happen. So sea level rise will continue, the Earth will continue to warm but at a slower and slower rate, if we stop pumping out quite as much CO2. And obviously, if we can find ways of extracting it, to research that, that would help. One of the things that does extract it, believe it or not, is basalt. Stuff that volcanos erupt, right? Now, if you look at photographs of volcanoes, the land around them is very fertile. So you can actually replace artificial fertilisers by ground up basalt. And that will act as a fertiliser, because it’s got all the minerals in it, but it also absorbs CO2. So it actually helps reduce CO2 whereas artificial fertilisers in making it they produce CO2, they produce nitrous oxide, etc, etc. So one of our proposals is that we start switching quite rapidly to using ground up basalt which costs next to nothing. There’s 300,000 cubic kilometres of basalt in India. That’ll take a long time to use that up.
Gene Tunny 44:12
Right, I’ll definitely have to check this out. I mean, this is a big issue for Australia. How do we get to net zero? And I mean, Britain’s probably got some advantages over us, you, you don’t have as big an area. I mean, we’re gonna have to build all of this transmission to connect up the renewable energy. Like we don’t have nuclear energy here and the Opposition party is trying to push it, but then I think there’s going to be a lot of community resistance to that here in Australia.
David Hendry 44:37
Yeah, I can believe that. But do people understand small nuclear reactors? That’s the only ones we’re arguing for, not the big ones, the small ones. In Britain, lots of big ones. And they’ve produced a lot of transuranic waste, that’s going to be a huge problem for humanity. Now, there are two advantages to small nuclear reactors. One they can use that transuranic waste as their fuel and greatly reduce the amount of radioactivity that needs to be dealt with from it. And secondly, they’ve been used in nuclear submarines for 50 years, and there’s never been an accident. So they’re very safe and they don’t have any fissionable material that terrorists might want for bombs. I mean, the stuff they’re using is useless. Other than burning up the waste, it’s a problem anyway. So if the public knew that these are harmless, that they’re getting rid of a problem, you don’t have nuclear reactors, so it’s less of an argument there. But in Britain, people would jump at the chance to cut the amount of nuclear waste that needs to be disposed of, burying it or put it in deep caves, etc. And these guys can do it
Gene Tunny 45:52
Right Yeah. These are the small modular reactors, are they?
David Hendry 45:56
Yes,
Gene Tunny 45:58
I think that’s what Peter Dutton, who’s the Opposition leader here, what he’s talking about,
David Hendry 46:02
Oh good for him, I think they are actually an important component, but only one possible component of an electricity provision, that would give more energy security. And, and be something that can work in almost all circumstances.
Tim Hughes 46:18
This is an area that we’ve talked about a few times, and one of the things that comes up is that the most likely scenario would be to have a suite of different options as to where they get the power from. So for instance, we’re very lucky here in Australia, we have abundant supply of sunshine. And so that’s clearly one of the options open to us, which we currently use, and it will grow. But there’s also hydro, there’s wind, there’s other options and having the various different things available. So that for instance, I mean, I know in the UK, for instance, like to rely on solar isn’t something that you’d want to rely on fully. So it would be the same everywhere I imagine and that that those suite of options or those suites of available power supplies would be different around the world. But it does seem to be that a lot of this is driven by the market, which we’ve noticed here and it has come up in conversation, which is that’s that seems to have been a big change, where that it’s been widely accepted that climate change is real, and that most people do want to have clean oceans, clean atmosphere, clean fuel. And so that driving force from the market, seems to be also then instigating the technology from the suppliers of those options, you know, people like Elon Musk, or, you know, these, these people who can make things happen very quickly, much more quickly than governments can. So it seems to be accelerating and going in the right direction. And so the net zero target is 2050. I think, is that right for the UK?
David Hendry 47:51
That’s right, it’s too far in the future. But we’ve picked it because the costs of adjusting to it are near zero, and probably even positive benefits from doing it slowly, in terms of machinery running out, cars getting obsolescent, trucks needing replaced. Developments, I mean, in solar cells, for example, Perovskite cells are now able to produce 30% of the energy from the sun as against the standard solar cells 22. That’s an enormous improvement. And that technology will take a little while to get commercialised and applied. And then people will have much, much more efficient solar cells to put on their roofs.
Tim Hughes 48:32
And the infrastructure needed for electric vehicles is obviously going to be enormous, especially in the built up areas. So it’s going to take some time for it all to happen.
David Hendry 48:44
Absolutely, but if the market prices correctly, it can be profitable for them to instal all the connections, it doesn’t necessarily cost much in the same ways they built filling stations. I mean, they didn’t build them for fun. They built them to make a profit to build these guys to make a profit as well.
Gene Tunny 49:03
Yeah, there’s some big issues here. Tim, one thing I would say on the solar I mean, even though we’ve got abundant sunshine, the challenge is, it we’ve got to store that solar energy for when it’s actually because yeah, that’s one of the problems because you don’t have it at night and yet there’s a big peak in demand when everyone gets home from work. And yeah, that’s why we’re having to build hydro where the State government’s here is investing heavily in hydro and trying to progress some couple of hydroelectric plants quite rapidly, which is, which is what you need to do so
David Hendry 49:33
Yeah, Britain’s rethinking hydro again, taking the Great Glen and converting it to a massive lake to reservoir to bag more hydro and Norway has always produced most of its energy from hydro. The first ever house to be lit by electricity was driven by hydroelectric. Armstrong, the gun manufacturer, built a hydroelectric system for just providing his house with electric lighting. That’s the first in Britain. So that’s part of the 19th century that we could have got an all electric world. And storage is a big problem Gene really is. And we’ve recommended using nighttime much later nighttime surplus energy to produce hydrogen. There are several methods, let’s not go into them parallel assistant electrolysis and creating liquid hydrogen, right. And liquid hydrogen is a fantastic storage of power. Okay, and you can use it either for heat, or to provide the electricity that you don’t have otherwise, indirectly or as a high heat source for industry if we’re going to get rid of coal and oil, they’ll need a high heat source. Well, you just see NASA’s rockets taking off and you realise you can get a lot of heat using liquid hydrogen mixed with oxygen
Gene Tunny 50:56
And so do you think that could be commercially viable, we’re trying to build a hydrogen industry here, not me, but the state government and the industry. And I know the Japanese are very interested, Mitsubishi and companies like that they’re looking at, they’ve got all these exploratory projects up and down the coast here. I mean do you think it could be commercial?
David Hendry 51:16
Yes, definitely. I don’t know what the cost to steel makers is of their energy provision. But if the hydrogen is made from the surplus energy at night, from things that wind turbines, which often have to be switched off, because you’re producing electricity that can’t be consumed, but it will always be able to be consumed from making surplus hydrogen, that’s our surplus energy for making hydrogen. And the cooling will also require a lot of energy. So I think it could actually, they could actually end up paying people to make hydrogen. Right to stop the wind turbines being turned off when a large percentage of your electricity is coming from wind turbines. And it’s coming at night, when you know three in the morning, the demand is zero. So I think there’s strong possibilities of using that.
Tim Hughes 52:10
That’s good battery technology is really another area as well, of course that is is going ahead. I was just trying to remember the name of the technology, I think it’s single cell batteries. If that sounds right. But I know Toyota, for instance, have invested a lot of money in this next generation of batteries. And it’s been talked about in the realms of that there will be sufficient enough in a car that you’ll be able to power your house from your car. So it’s that kind of capability that is being expected. Remember John Atkins, mentioned this in one of the
Gene Tunny 52:42
Yes, we might have to go back to that Tim and have a look and put some links in the show notes.
Tim Hughes 52:49
It’s a thing, it’s a thing. I didn’t make it up, I promise.
David Hendry 52:51
Okay, so you have to remember that using that kind of technology, a glider went around the world. Right? Yeah. It was a glider, but they did do it, and Britain has several electric aircraft for short distance travel, which are all electric. And trains. I think both Germany and Britain have been developing trains that ran off fuel cells of the kind that are driven by hydrogen. And they do produce enough electricity. But at the moment, the machines that do it are enormous and very heavy. So they have to find some way of producing fuel cells that work from much less expensive and heavy technology. But why not have solar cells in the roof of your car? Well, at the moment people would rip them off, of course, thieves would just take them, but they become ubiquitous. That may be one of the routes that we could do. Another as you mentioned, Musk, at one point, Tesla put up a video on the car being the battery. And they used graphene tubes filled with electricity all the way around the car, and then it provided enough electricity to drive the electric engine for 1000 miles. They dropped the video very quickly. And we don’t know if they dropped it because it was giving away secrets of they didn’t want or it didn’t work to try to match it didn’t work. I think it should work. I can’t believe that I mean graphene is a super capacitor can store enormous amounts of electricity. And there must be a way of using it and making graphene has now become very straightforward. You can take waste plastic, it was a laser and you turn it because it’s a carbohydrate you turn it into carbon and the carbon can be turned into graphene. Just pick up the tiny bits and join them the way that they originally discovered graphene in Manchester.
Gene Tunny 54:57
Incredible. That’s just incredible what’s going on, David we’ll have to put, I’ll put a link in the show notes to your research group on climate at Oxford, isn’t it. So I’ll put a link in because there’s links to all sorts of great stuff you’ve done and all great articles. There’s one more thing I wanted to cover before we wrapped up, because I know we’re getting close to time. There was one thing that you mentioned in that talk that you gave in 2010. This was to the Institute for New Economic Thinking, if I remember correctly, I think was George Soros in the audience? It was incredible. It kept showing George Soros in the audience because I think it’s his, his Institute, or he funds it. But there’s a mention of the insurance company, you talked about this large US insurance company that you’ve done some modelling for or they were using your approach and 5000 variables, and but only a few 100 data points? And could you give us a flavour of what type of modelling that was? I mean, without revealing anything commercial, I was just…
David Hendry 55:55
Yeah, okay. So the 5000 variables are things like a 28 year old, single woman living in Texas with one car, and no children and owns their house. And that’s a variable. Right. So they then price their insurance for her house, knowing all these factors. They were finding that the sales were getting too difficult. And they wanted some simplification of what was actually driving their profit. So Jurgen Doornik who actually did this work, already had auto metrics, working with quite short time series on these sorts of various people. But you could then model all the things that might be taken into account and discover, actually, it didn’t matter that they were single, it probably didn’t matter, they’re female, it probably didn’t matter they’d no pets, right? What mattered was that they owned the house or didn’t own the house that did have a mortgage or didn’t have a mortgage and whether it was fixed term or so very few variables turned out to matter. And it allowed the company to dramatically simplify the number of people that they employed for sales, right, they came way down until when the financial crisis hit, their cost base was vastly lower. And they survived the financial crisis in the way that many insurance companies didn’t, because they, you know, they lost so much money in housing, for example. So that, although it says 5000 variables in most of them could never have mattered when being male would not apply taking female, for example. So males would not have been entered in the models for females and age that older people can’t be young females. So you can see immediately, although they talked about, we talked about 5000 variables, and there were most of them wouldn’t have been relevant in any given situation.
Gene Tunny 57:56
Right. And so this was the autometrics or autometrics is that part of
David Hendry 58:00
OxMetrics. That’s part of the OxMetric system. And it’s written in Ox, Ox is a computer language that Jurgen developed in the 1990s, early 2000s, it was the first attempt to get fully automatic modelling. And I have to say, our first attempts were really ridiculed by the profession, the idea that you can automatically model it didn’t require human intervention. Well human intervention is of course, thinking about what goes into the model. After that, itt’s pointless spending hours trying to see which is the matter when the programme can do that much more efficiently, much faster and much more generally. So it gives, we believe it gave much more time for thinking and much less time wasted in front of the computer desperately trying to find the model.
Gene Tunny 58:51
Yeah, it sounds to me like our central banks and treasuries and finance ministries should be, yeah they should, if they haven’t got a copy of your programmes, they should get a copy of them and start applying them because we certainly need to do better than the, than we have been in terms of forecasting. So…
David Hendry 59:09
RBS definitely has a copy, the sorry the RBA.
Gene Tunny 59:14
Okay, yeah. Yeah. It’s hard to know what they rely on some, I guess they they’ve got a model. I don’t know to what extent that it informs their policy actions. They got this Martin model, which is Yeah, yeah, it’s I don’t know. I don’t it doesn’t I don’t know whether it’s was developed using your
David Hendry 59:25
No, it wasn’t.
Gene Tunny 59:30
No I might have to come back to that because it’s a it’s a rather complicated model not not today, but just just good to Yeah, it’s good to good to find that out at least they’ve got your software if they and hopefully they’re making use of it to some degree. Okay, Tim anything more for Sir David?
Tim Hughes 59:50
No, I just think so it was really interesting. Thanks again for your time, and I think it just reinforces the, the way you talk about the modelling and the conversation we had about AI. Again, it’s something that’s come up in other areas where it’s a really powerful tool, but there’s a human discernment at some point to sort of like, bring it all together. And without that, it’s only so useful. And so I think it’s always encouraging to see that we need that human intervention to make sense of things. And sometimes humans get in the way of good modelling. I imagine, you know, that, but if we can give that amount of work over to the models and the AI to do the work for us as a tool, then, yeah, it’s very powerful.
Gene Tunny 1:00:35
Very good. Okay. Well, Sir David Henry, thanks so much for your time. I really enjoyed it really appreciate it really learned a lot. So thanks. Thanks so much.
Tim Hughes 1:00:40
Thanks for your time.
David Hendry 1:00:43
Thanks a lot. Thanks for having me interviewed.
Tim Hughes 1:0046
You’re welcome.
David Hendry 1:0050
Take care.
Gene Tunny 1:00:54
So Tim, that was an amazing conversation with Sir David Hendry, what did you think?
Tim Hughes 1:00:59
Yeah, that was fascinating. I really enjoyed it. I was a very happy audience member for most of that but yeah, I really lapped it up.
Gene Tunny 1:01:06
Ah, you’re more than just an audience member Tim! I mean, I think you are. You’re participating in that conversation. And you’re asking some good questions. So yeah, it was good to have you onboard. And what I found fascinating is I mean, I had the I had the line of questions about forecasting. And then we went broader than than just the forecast. And we started talking about climate econometrics. And you know, what he’s doing the modelling of getting to net zero for the UK, which I thought was absolutely fascinating.
Tim Hughes 1:01:40
Yeah. And he mentioned that the modelling hadn’t actually progressed in many ways, like, not necessarily with the climate econometrics, but with the other modelling that we were talking about in the first half of the conversation, which was surprising to hear.
Gene Tunny 1:01:53
Yeah, the forecasting. I mean, not what he’s doing, because he’s really a leader in forecasting
Tim Hughes 1:01:59
Yeah so his model he could back
Gene Tunny 1:02:03
Yeah, I mean, and of course, he’s going to back his own modelling, but I’d actually believe it because he’s one of the gurus of econometrics. So when I was studying econometrics, or first started studying back in the 90s, he was one of the big names. And yeah, the approach that he had this general to specific approach where you’re, you’ve got this very general specification, you’re trying to hone in on this more specific specification, you’re searching for the right functional form the right way to express the equation, the right variables, the right number of lags, and some clever things to get things back on track. If they’re shocked things like error, they call them error correction mechanisms. You remember, he was talking about the volcano modelling the global temperature after a volcanic eruption, I thought that was really interesting how he had this clever little functional form this V shape to get to get it back on track to model that I thought that was really clever. And I mean, he’s renowned for doing that sort of thing in his economic models. And, yeah, I was surprised that there hasn’t been a more widespread take up of that approach. And I think my takeaway from this is that, yeah, there needs to be more education or more outreach from from David’s group, I guess, at Oxford to really, you know, promote their their methodology, I guess they’re they’re doing it, they’re trying to do the best they can. And it looks like, you know, central banks or reserve banks got a copy of their software, the OxMetric software, which has PcGive and the other, the other parts of that software, but from what I’ve seen, it’s not as widely used as it probably should be
Tim Hughes 1:03:50
With any modelling, couldn’t that just be run in tandem as a hypothetical to see how it might have performed against the current models? Is that how it would work?
Gene Tunny 1:04:00
Yeah, yeah. And hopefully, they’re doing that. But
Tim Hughes 1:04:03
yeah, because like, you would think at some point, you know, if it’s outperforming, everybody’s interested in, you know, the best outcome s o it would be interesting to see, didn’t, didn’t actually ask that direct question. But that would be interesting to know if that might be feasible or possible, or if it’s been done?
Gene Tunny 1:04:20
Well, I think hopefully, the central banks and Treasuries are using this approach, or they, or I hope they they’re experimenting with it, they should use it more from what I can tell. What I found interesting about our conversations, he was talking about how I forget whether it was the Treasury in the UK or the Bank of England, they were overestimating productivity growth in the UK for a consistent period for like a 10 year period or something. And so that sort of mistake could have real consequences because if you, if you’re overestimating productivity growth, then you’re overestimating what you’re GDP growth is, what your economic growth is, your, in your forecasts, and therefore, what that would mean is that you may not have your policy settings, your monetary policy settings, right, because you think GDP growth is going to be faster than it actually will be. And so maybe you’re not giving, you don’t have the bank rate low enough to to help, you know, promote economic growth. So that sort of forecasting error can have material consequences, if you know what I mean. So it’s important to get these forecasts, right, because if you’ve got those forecasts of where the economy is going wrong, then that can affect what the Bank of England does, or what the government does with its budget.
Tim Hughes 1:05:41
Yeah. And it seems to be human. The human influence, which is the most unpredictable, or the, the element that is most likely to bring around an incorrect forecast.
Gene Tunny 1:05:53
Yeah, I mean, I guess the human element and yeah, I mean, all sorts of things. But the problem is that the economy Yeah, I mean, ultimately, it’s about humans, because they’re, they’re the the units in an economy. But the economy is so complex, and so many moving parts, it’s just very difficult.
Tim Hughes 1:06:13
There was some, also, with the second part of it, the climate, econometrics, which was fascinating, I didn’t realise the extent to which Sir David had been involved in that. And so he was very deeply involved, and it was really interesting, that part. And I know we’ve talked about climate and getting to net zero and the the challenges faced with that, and the changes in the technology that is driving us towards that, which is obviously an ongoing and very interesting subject. And I have to say, so I made a, I was trying to recall this information that our friend John Atkins initially mentioned to us about solid state batteries. So I was trying to remember what it was exactly. So this, these is the one of the new generation of batteries, which, you know, is still in development. So we’ll link in the show notes, I found something from the Guardian of July 2023 that explains a little bit more about solid state batteries.
Gene Tunny 1:07:00
Oh, good. So what does it say?
Tim Hughes 1:07:05
It says, just briefly, that basically Toyota has made a breakthrough that will allow it to halve the weight, size and cost of batteries, it would be that we are, da da da make batteries more durable, and believed it could now make a solid state battery with a range of 1200 kilometres or 745 miles that could charge in 10 minutes or less. And the company expects to be able to manufacture them as soon as 2027. So this is obviously not, it hasn’t happened yet. So this is a projection. But it seems that they’re quite close. So this is the sort of, I saw this a few months ago, it wasn’t the Guardian article, it was something through ABC, I believe in Australia. Along those lines of about Toyota has worked with solid state batteries. Clearly, there’s technology being, you know, pushed forward all around the world on different areas, and which ones come to the fore or make it to market like, you know, we can only speculate. But it certainly seems that there are changes coming and more efficient, effective ways of storing energy and producing energy, that are all moving towards that target of net zero by 2050.
Gene Tunny 1:08:16
So this is something that’s better than the lithium ion batteries. Yeah.
Tim Hughes 1:08:21
And like everything else, there were problems at the beginning that they’re trying to work out. Yeah. So yeah, it says that for benefits compared with liquid based batteries. I think one of them was I saw that it doesn’t, they don’t burst into flames as easily, which is a good thing, like so when they say there’s no spills, for instance, from a solid state battery, if they get in a prang, or whatever may happen. I mean, I’m sure that there’s pros and cons with most new technologies. And I’m sure there’s none. You know, it’s no different with solid state batteries. But it seems to be one of the ones that’s coming through, it’s been around for a little while, and it seems to be progressing. But it’s just one of those areas that by the end of this decade, it’s going to be very different. And of course, by 2050, there’ll be things we haven’t even heard of yet, that will be key parts of the whole target net zero target,
Gene Tunny 1:09:10
We might have to get someone on the show who can explain to us batteries, solid state versus other types of batteries, because I’d be fascinating to know about the technology and what minerals are required. Right? Because I mean, you had that conversation with Guillaume about the Dark Cloud, wasn’t it? And that’s, you know, the, the fact that we do need to mine all of these, these critical minerals and that’s that’s got consequences, of course. So yeah, we’ll be good to have that conversation. Tim, one of the other things I found fascinating, yeah a couple of other things in the conversation. I found David’s point about all the technology that was available at the end of the 19th century. I thought that was fascinating. That was fascinating.
Tim Hughes 1:09:55
I didn’t I didn’t know that at all. That surprised me. It surprised me big time.
Gene Tunny 1:09:59
Yeah. yeah. And also the point about nuclear energy I was, yeah, that was really surprised by that, that he was so positive about it and thought it could work here in Australia, and that perhaps some of the concerns that we have in Australia, about nuclear energy are misplaced.
Tim Hughes 1:10:20
So that was specifically modular.
Gene Tunny 1:10:23
Yeah, the small modular reactors, and he’s saying they’re a lot safer. And this is something I talked about Ben’s, I talked with Ben Scott, about a couple of years ago, I think, on this show, the potential of small modular reactors, I though that was good that David brought that up.
Tim Hughes 1:10:39
Yeah, that was interesting. I hadn’t actually heard of that before. And I know that we’ve, like spoken about it before with Josh Stabler, for instance, with the the likelihood that there’s going to be different solutions to the energy provision in the future. So it’s not just going to come from one main source it’s going to come from most likely several different ones. So if modular nuclear power stations are a part of that, that’s quite possible. But it’s clearly going to be not just one thing. And just on that subject as well. There was it was mentioned about graphene, David mentioned, oh, yeah, I know this, that’s come up in a conversation we’ve had before here in Brisbane. There’s GMG, who are involved in that, here in Brisbane,
Gene Tunny 1:11:23
with GMG. So G stands for graphene I guess, and there’s…
Tim Hughes 1:11:27
Graphene Manufacturing Group. And so it’s in the space of renewable energy, and this whole push towards clean energy.
Gene Tunny 1:11:35
But what’s graphene got to do with it? Because graphene is a material, isn’t it?
Tim Hughes 1:11:39
Very good question, Gene. And this is something that I will get back to you as soon as I know. Yeah, because this is actually my solid, solid state battery moment in the in the wrap up, I managed to get another one in. So we’ll put something in the show notes to do with the graphene, but I know it was, it came up in a conversation we had with
Gene Tunny 1:12:02
ah apparently it’s going to create products with a better efficiency than the existing ones.
Tim Hughes 1:12:07
Yeah so it’s part it’s part of the all of this emerging technology towards better energy storage. Like most other things, it’s happening in many different parts of the world at the same time but we do have this, this company in Brisbane,
Gene Tunny 1:12:19
it looks like Yeah, yeah. Sorry Tim I just noticed it looks like someone’s built a graphene solar farm. So it looks. Okay.
Tim Hughes 1:12:25
Yeah. So to be to be explored, like, because it’s not something I know a great deal about, or, you know, so I think that w’e’ll definitely will, will earmark that for the next conversation we have about clean energy and where that’s going.
Gene Tunny 1:12:36
Yeah, for sure. Because this is it’s an ongoing issue. And I mean, the conversation, this isn’t going away. And you look at this northern hemisphere summer, and yeah, I mean, that’s just going to intensify this conversation, I think. Yep. Yeah. Okay. The other thing I thought was good about the conversation with David, I liked your question about AI and what’s happening with AI? And David pointed out, well, what they do, their algorithm, their automatic model selection algorithm, their auto metrics, that’s a form of AI. I thought that was a good point that he, he made there. Yeah, yes. Yes. So yeah, it was good question. So all in all, what a terrific conversation. And yeah, I really thought Sir David was amazing. He’s someone I would love to have here in Australia participating in the Australian policy debate on energy in particular, I think he could be that he could provide that sage perspective. He’s someone you’d pay attention to, he’s someone who’s very thoughtful, you know, good communicator, and as well as being a real gentleman.
Tim Hughes 1:13:43
Yeah, I really enjoyed it. And I found it very eye opening. And yeah, I think there’s, like you say, it’s an ongoing conversation. So it’ll, it’ll keep evolving. And hopefully, if we can, maybe they’ll be a round two with Sir David to continue that conversation.
Gene Tunny 1:13:59
We can only hope, so Tim, anything else before we wrap up this, this debrief?
Tim Hughes 1:14:05
No, I think I think I should stop while we’ve still got enough room in the show notes for
Gene Tunny 1:14:13
you introduce a new concept – then I ask ‘Tim that’s fascinating can you tell me more?’ Nope!
Tim Hughes 1:14:20
They say a little knowledge is dangerous. On this one I was lethal, but no, it was fun. I enjoyed it. And yeah, it’s it’s something that affects us all. And it’s something that’s changing very quickly. And so yeah, we’ll we shall return to that conversation no doubt.
Gene Tunny 1:14:36
Absolutely. Tim Hughes thanks for joining me on this conversation.
Tim Hughes 1:14:40
Thanks Gene.
Gene Tunny 1:14:43
Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it? Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
1:15:27
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
Relaxed caucasian young businesswoman ceo boss freelancer student employee meditating at workplace in office at the desk after hard-working day, trying to concentrate on deadline
Andrew May, a leading Australian performance coach and host of the Performance Intelligence podcast, discusses the relationship between physical & mental fitness and CEO & business performance with show host Gene Tunny and his colleague Tim Hughes. Andrew shares insights into the areas he focuses on when coaching top performers, including CEOs and elite athletes.
Andrew May is CEO and founder of StriveStronger, a digital consultancy that partners with organisations to create cultures of wellbeing. He presents inspiring presentations and is recognised as one of the world’s leading performance strategists. Andrew works with a number of elite athletes and is the Mental Skills Coach for the Parramatta Eels National Rugby League Club. Andrew is a former middle-distance runner who was an assistant coach at the Australian Institute of Sport in Tasmania. He has worked with multiple Olympic/international athletes in track and field, tennis, swimming, hockey, netball, basketball and AFL; culminating in working as the Physical Performance Manager for both the NSW and Australian Cricket teams. Andrew has dual degrees in the body and brain – completing a Bachelor of Applied Science in Exercise Physiology (body) and a Masters in Coaching Psychology (brain).
For further information about Andrew, check out his full bio:
“Using comprehensive data on 28 cohorts in Sweden, we analyze CEO health and its determinants and outcomes. We find CEOs are in much better health than the population and on par with other high-skill professionals. These results apply in particular to mental health and to CEOs of larger companies. We explore three mechanisms that can account for CEOs’ robust health. First, we find health predicts appointment to a CEO position. Second, the CEO position has no discernible impact on the health of its holder. Third, poor health is associated with greater CEO turnover. Here, both contemporaneous health and health at the time of appointment matter. Poor CEO health also predicts poor firm outcomes. We find a statistically significant association between mental health and corporate performance for smaller-firm CEOs, for whom a one standard deviation deterioration in mental health translates into a performance reduction of 6% relative to the mean.”
Leibniz Information Centre for Economics & Centre for Financial Research (CFR), University of Cologne working paper titled “Does CEO fitness matter?”
This study provides evidence suggesting that CEOs’ physical fitness has a positive impact on firm value, consistent with the beneficial effects of fitness on, e.g., cognitive functions, stress coping and job performance. For each of the years 2001 to 2011, we define S&P 1500 CEOs as fit if they finish a marathon. CEO fitness is also associated with higher firm profitability and higher M&A announcement returns.
Transcript: The importance of physical & mental health for top CEO performance w/ Andrew May – EP193
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. then checked over by a human, Tim Hughes from Economics Explored, to pick out the bits that otters might miss. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:06
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.
Hello, thanks for tuning in to the show. In this episode, my colleague Tim Hughes and I chat with Andrew May, a leading Australian performance coach. Andrew’s worked with sporting teams and he now coaches CEOs of major companies, including the CEO of one of Australia’s biggest banks. Andrew is also the host of the Performance Intelligence podcast, which I can highly recommend. Tim and I had a great chat with Andrew about how physical and mental fitness can translate into CEO and business performance. We got some great insights into the areas that Andrew focuses on when he’s coaching top performers, whether CEOs or elite athletes. Okay, let’s get into the episode. I hope you enjoy our conversation with Andrew May.
Andrew May thanks for joining us,
Andrew May 01:33
Good to chat looking forward to this conversation. Yes,
Gene Tunny 01:36
yeah, it’s great to connect with you Andrew, Tim’s you know Tim from way back. And Tim has put me on to some of your work. And I’ve been reading MatchFit and enjoying it. I guess what prompted this conversation was an article in the financial review a couple of months ago, which was about Generation X Men and given I’m one of them, that was, I took note of it, how they are tackling their mortality. And it mentioned you and to Tim, it already mentioned you to me and so I noticed it and it said you’ve been coaching CEOs of ASX 50 companies, so major corporations in Australia such as, Matt Comyn, the CEO there and then it got me thinking. I’m wondering, how do you go from being a performance coach to the Australian cricket team? If I’m getting that right to coaching CEOs? Can you tell us a bit about that story, please, Andrew?
Andrew May 02:35
Yeah absolutely but before I do, if you want to know about being match fit, look at the guy sitting on your left. I first met Tim 20 years ago, he still looks the same full head of hair. So it’s great to reconnect
Tim Hughes 02:47
smoke and mirrors.
Andrew May 02:50
So how did I end up coaching executives and doing mental skills for elite athletes around the world? There was no definitive plan, Gene, and a lot of your listeners are going What do you mean, you didn’t have a 20 year plan? No. I was a good athlete, not great. I won multiple state championships but never won at the national level had a scholarship at the IOS in Tasmania. And we moved down to Hobart, which was wonderful in my early 20s. And I just finished studying exercise science, I had a physiology base and then went to the Institute of Sport. And it was a great learning in that high pressure environment. And when I look back, I got to the level I believed I could get to and I believe coaches should coach what they’re good at or what they’ve stuffed up. And if you can combine the two, you’ve got a really interesting mix. I left talent on the track literally. For any athlete, any executive I work with my real fuel is to help them fulfil their potential. So back to in Hobart. As a runner in Australia, you don’t get paid a lot of money. Unless you’ve been Craig Mottram or perhaps Sally Pearson So I had to supplement my income back then it’s not politically correct. And I used to walk fat blokes. It’s now called personal training. So the clients I had that’s Timmy when I met you, when I moved back to Sydney, after I finished down in Tasmania, and during a lot of the clients, I were training, they would lose 10 or 15 kilos. And then they’d say, Do you realise I’m not as cranky with my wife or my husband on the weekend and the kids are not saying I’m an A hole, and I’m actually conscious of their school sport. And I’m not just thinking about what’s going on here and I’m making better decisions and I’m more creative and we’ve opened up these other options in Asia. What have you done to me? I don’t know. Just keep walking. Don’t drink as much alcohol on the keep swimming in the ocean. So I’ve been really started to look into Whoa, there’s a link between well being physical and psychological well being and executive performance that was 20 plus years ago. When I moved back to Sydney. As you mentioned, I was working in cricket as a fitness trainer for the New South Wales Cricket team for 8 years And then an amazing opportunity was to travel the world with the Australian cricket team. For a couple of years did some work with the Sydney Swans. I’ve always danced between corporate work. And because the personal training then evolved to corporate work, because the men and women I was training ran companies and they said, Hey, can you do this for our company? And, Tim, you know this with a personal trainer background, you walk in there and go, how on earth do I run a programme for 100 people, well if you’ve been doing a one on one, you just work out how to add group dynamics and amplified, because you’ve done a lot of the reps and sets. So that’s really the evolution Gene, studying and then as an athlete, and then experience that’s over 25 years and I added psychology I did a degree a master’s in, in coaching psychology, I finished that about five or six years ago. And that not only gave me confidence, because when you’re in sport, you’re actually not coaching at the higher level you’re often telling, because I wouldn’t say to my cricketers ah guys, what do you think? Let’s have a dialogue around that. It’s like do this and get on with. And I found when I shifted and some executive started to say, Hey, can you come and work with me, some of them left because I was very didactic, here’s what you got to do. I was treating them like an athletic. So I really needed to learn about conversations and listening but still having a bit of a hard edge. And I say that to my clients, I’m not the coach who’s going to sit down with you have a cup of tea and sticky buns and talk about everything. That’s great. We’re going to talk about real challenges and have some of the robust conversations. But I was very, one way, here’s what you do rather than listening. So 25 years later, I look at a blend of science, exercise physiology, primarily about the body, coaching psychology, primarily about behaviour change and the brain, working in sport as an elite athlete, but being good not great and then working across multiple sports. And now I’ve gone back into sport. I worked for the last two years with the Parramatta Eels, as their mental skills coach, and I’ve signed on this year with the mighty Manly Sea Eagles. And I work with a range of other aspects. One of those being Tim Tszyu, the wonderful young boxer who’s got another fight in two weeks. And then experience in the corporate world has given me a unique set of skills that as I said, I’ve never targeted to say, hey, here’s a career plan. And I just find that blend between science between high performance sport and between having some experience really helps to conversations with some of those high end executives, because they’re just like, the three of us, they have challenges, they have problems, they might be leading a company, but that doesn’t mean you know how to lead your thoughts and your body and everything else in between.
Tim Hughes 07:37
I was gonna ask you with that jump to training CEOs. Obviously it attracts a certain personality type, alpha males or females to that role. How did you go in? Because you mentioned about, you know, a didactic approach? How did you manage to work that in with different personalities with the stronger personalities to be able to get them to change?
Andrew May 08:01
Stronger personalities I found easier, because I’ve had a number of strong personalities in sport
Tim Hughes 08:07
Right is there a is there a strong correlation or comparison between high performance sport and CEOs?
Andrew May 08:14
Yeah, it’s an interesting question. I think there’s a correlation. Up until 10 years ago, we’ve rounded it out. Now 10-15 years ago, a number of the CEOs or execs I’d work with, they’d been taught even if it was just subtle messaging that you don’t bring your full personality to work so leave your shoes at the front door and also leave your full personality and come in here and just be robust and be strong. A coach I had that really shaped me and he’s still a good mate of mine is Steve Rickson who was a wicket keeper and then he was coach at New South Wales Cricket and Stump has evolved a lot over the years as well. We laugh about this. The my interview with Stumper back at New South Wales Cricket and went for about five minutes. I was wearing a suit. He rocks up. He’s in a tracksuit and I said hello mr. Rickson. He says that’s my dad. Call me Steve or call me Stumper. Do you have a nickname? I said yeah it’s Maisie. I said is there a job description? This was my first role in sport back in Sydney as the strength and conditioning coach for New South Wales Cricket Team – can I swear on your podcast I do. Like I said job description. You come to a session tomorrow the guys have got a recovery session if they like you stay if not fuck off. And I said is that it? He said I know there’s one other rule. So what’s that? He said it’s rule number one. What’s that? Don’t ever be late. Because if you’re late fuck off, rocked up the next morning. So nervous, like I was 45 minutes early. And seven, eight years later, I’m still there. And in the initial couple of years, Stumper would be like alright, we’ll do the fitness and now Maysie fuck off. It’s cricket but to his credit, he saw how it was integrated it wasn’t just to fitness and then play cricket. So I had some great role model models like Stumper who were quite didactic, who were very strong. So Tim, I found that personality I knew, and I knew with a lot of those people, like Stumper underneath it all he’s a, he’s a teddy bear. He’s a lovely guy. And he’s very connected and very warm. The person I found more challenging was the person who wasn’t as forceful on that. And they maybe weren’t telling me exactly what was going on, but find someone false. Well, at least it’s out on the table and have a bit of a healthy banter. And with that personality pushing back, or at least talking to them, and having that dialogue, a respect comes, where I was struggling was if I had someone who wasn’t open, or who maybe was struggling, I didn’t know the levers to open up that conversation.
Tim Hughes 10:43
So that’s people armoring up basically, and not really wanting to let anybody have a look into the inner workings of who they are. I’ve seen a shift towards a greater vulnerability, and then acceptance of being vulnerable and being authentic, which has been really positive. And I think you’ve displayed that really well through your podcast, which is great. I know, I’ve got so many great episodes that I’ve enjoyed. I’ve had days when I woke up miserable and grumpy. And by the time I’ve got to where I’m going, I’ve listened to 20 minutes of a podcast with one of your guests and is back on you know, it’s great, because it’s,
Andrew May 11:17
I’m glad you got that sequencing, right. Better after listening podcast. I woke up, I listen to your podcast, and I felt tired and grumpy. So good boy getting the sequencing, right. Yeah.
Tim Hughes 11:29
But I’ve seen a definite shift in that acceptance, especially with guys to be able to, to open up. And it’s it’s not seen as a weakness to say if you’re struggling with something, or to be vulnerable, which is definitely a good thing now.
Andrew May 11:43
Yeah for the three of us, our generation. Our dads weren’t as expressive in their emotions. And I noticed with my dad, now he’s in his mid 70s. He tells me he loves me every time I get off the phone. Now, dad didn’t tell me he loved me to my mid 20s. The first time it was really awkward. And so it’ can be’s taken me a number of years, I was in my mid 20s. And now when he says that I’m saying back then I love you. Yeah. And I feel it and it doesn’t feel awkward. And I’m sure lots of people listening will go Ah he’s talking to me. I feel like that as well. Up until 40. When did I meet you Tim?
Tim Hughes 12:19
I reckon it was around 2008 2009?
Andrew May 12:23
Yeah, so it’s just before I went through a couple of years before I went through marriage breakdown, right. And at that stage, the persona I had, I was selling I was working to on TV, I’d written a book, I was doing some speaking, but I set myself up as a high performer because I’d been good at school. I’d been good at sport, and then I’d been up and sold a business. And I was good at that. So people got me because I was in inverted commas high performer. And then I went through a marriage breakdown. I was 40, I had two young kids from an Irish Catholic background. And I walked around I now know I walked around with functioning depression. And I’d hop on stages and talk about well being and all this stuff. And I would shift into a state and then I go into back into my hotel room and burst into tears. Who had no wife or partner. No kids permanently. It was half the time. No house living in apartment, no dog no purpose, no meaning, because I built this game of this this story that life is all about winning and achieving. And then what happened when I fell down? So the two years having to pick myself back up and drop the bullshit drop the facade. My best mate Mario, who I finished school with in Dubbo is a great man. And he said to me, Andy, I know you’re not okay. He asked me a question. I won’t say what it is. And I answered. He said, I know you’re not okay. Go see someone. We laugh about it now. And I saw a wonderful psychologist Jill McNaught who helped me unpack the schema I had that, that winning and life is about all these wonderful achievements. It’s actually also about how you pick yourself up. So Tim, and I sort of talk about the evolution of science. Yeah, science helps. And then working in sport helps. But where I think I really get traction with an exec or a CEO. When I say to other bits on my B side, so we often lead with the A side – you both remember cassettes – that’s your top hits. And my B side is I had cancer, and I judge that on my daughter’s age I had cancer, a melanoma on the left scapula removed just before Mickey was born. She’s now a gorgeous 15 year old. But with cancer I lived my spiritual father a man named Bruce Eaton who was my masseur in Hobart and Bruce died three months after he was diagnosed with cancer. He was diagnosed two days after me. So when I went to say goodbye to Bruce, I thought, oh my god, the DICE can roll different ways. Why is Bruce not here? But then I got on with it. I didn’t really learn from that. It was like I had cancer and lived but I’m going through a marriage breakdown the story of this scheme arrived built in from an Irish Catholic background, mum and dad are still together. After 50 plus years, I felt like such a failure. So if I saw you Tim in those early years, I probably would have avoided you. Because I didn’t want to talk about where I was. Or I would have made something up. And then I just now go, Hey, we all have highs and lows. And that’s part of the human experience. And when I talk to an exec like that, especially men, they go, here’s my story, and then the bullshit facade comes down, and they’re real. And then you get on to some practices and some coaching around it.
Gene Tunny 15:36
Andrew, can I ask, I’m interested in that, because I can see how you having had that experience that can help the your advice? And well your empathy? And then your advice to the executives? What do you find are the biggest things that they need to work on? Are there commonalities or is it different across executives? What are some of the big things that you’d work on with them?
Andrew May 15:56
Yeah, it look, I did learn a lot from that Gene from that experience, but it was expensive. So
Gene Tunny 16:01
Oh, yeah, yeah.
Andrew May 16:03
When you go through a marriage breakdown, anyone who has, it’s extremely expensive, and not just from a financial from an emotional from every our spiritual point of view. So I like to tell my male and female clients who lean in and listen, because you can save seriously can a lot of people can save a relationship breakdown by putting some of these building blocks into practice. But there’s five when I talk about leadership capacity. And these are the essential building blocks. If you don’t do this, we don’t get to the fancy stuff. Because I’ll often get someone come to me say, I want to do presentation skills. Can you? Can you work with me on high order mental skills I had someone recently said, Look, I know you’re working with Tim, Tszyu. And I’ve seen a real shift in him. Can you teach me with confidence? I might. Yeah. Let’s start with storytelling. And the narrative you tell yourself. So we’ve started the basics first. So the five basics are number one is operating rhythm. And we’ve got to get the the work and the year in balance. But if I look out of my office, where I’m recording from the beautiful sunny day today, the sun rose this morning, it’ll go down tonight tides rise tides fall, there’s this natural rhythm in nature. And we need a similar rhythm in the corporate cycle.
Gene Tunny 17:12
So you’re in Sydney. Are you Andrew? Sorry, you’re I’m in Sydney. Yeah. Yeah. By the beach. Are you?
Andrew May 17:16
I’m in Lavender Bay. Yep. Yep. Yep. So the first one is operating rhythm. The second one, we look at his energy balance. And this is where I’d say, Gene, what’s draining your energy? actually need a boost of energy champ? No. First, let’s put a plug in the bath and stop you draining energy. And that can be relationships, very pertinent to your great podcast, finances. Make sure you’re basic on wealth management and spend less than you earn. Where else are you draining energy, and then we can look at boosting energy. The third one I’ll look at is downregulation. And I blame Pierre de Coubertin, the little Frenchman back in 1894, who carved out the Olympic motto Citius Altius, Fortius. Do you both know what that means? How’s your Latin?
Tim Hughes 18:07
I remember you talking about this on one of your podcasts. And I know the bit that you’re gonna say, which is missing. And I can’t remember exactly what it is. But I know the missing bit faster, higher, stronger. And rest is what’s missing.
Andrew May 18:18
There’s no rest and recovery. So the Latin word for that is Rika partea. So if we could go back to 1894 Pierre de Coubertin, love what you’ve created with the Olympic movement, but you’ve missed recovery champ. The fourth one is mental skills. If I said to both of you, if you want to get your body fit, fast, flexible and strong. What do you do? Go to a gym, join a sport, get a personal trainer. If you want to get your brain fit, fast, flexible and strong, what do you do go to the mental skills gym. And then the fifth one is using wearable tech to track it. So they go through the five number one is get a sustainable operating rhythm. Number two is get the right energy balance, get rid of what’s draining energy. And then we’re going to amplify what boost energy. Number three, we look at downregulation which is Psychological detachment and parasympathetic activation. So that rounds out the Olympic motto. Four is mental skills and five, get a wearable. So you can get some KPIs to see exactly where your body is tracking. They’re the building blocks and when I get someone on that, I know they’re going to be sustainable, and they’re going to be able to get to that next level.
Gene Tunny 19:23
I keep forgetting what parasympathetic means. Andrew, are you able to explain what what you mean by Paris? Was it parasympathetic,
Andrew May 19:31
parasympathetic, so stress is sympathetic nervous system recovery is parasympathetic. So parasympathetic just means everything goes down. So heart rate drops, okay, your restore your recovery rates go up, your digestion drops down, your blood pressure drops, your muscle, contractile, it all drops. But interestingly, when your body down, regulates and gets into parasympathetic, one thing goes up. Slow brainwave patterns. So for your cerebral people listening to this going, Well, why do I need to do all these fitness stuff or body stuff, or when you slow down your body? Just slow brainwave patterns go up that slow brainwave pattern. So when we get out of beta, which we would be at now thinking, talking, reflecting, and when you drop into those, those Alpha brainwaves, that’s where you come up with your best decisions. That’s where you problem solve. And that’s where you get creativity. So it’s getting this nice dance Gene between your body up and down. But we’re geared. Everything’s up, everything’s about regulate, and recovery, or downregulate is seen as a weakness. So that’s rubbish. It’s a strength.
Gene Tunny 20:43
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Gene Tunny 21:18
Now back to the show. Can I ask you about this operating rhythm? I think I understand what you’re talking about. Because I’ve read MatchFit. And what I liked about that, as you talk about how in, if you’re a sports person, you’ve got the season, you’ve got the off-season. And then you’ve got the game day, and then you’ve got the days of recovery. So it’s built into the the actual game itself or the or the sport? Are you encouraging people to think like that, like if I’m a business executive, I’ve got to be thinking about that at work, I just can’t be full on all the time, because I’m going to burn out, I need to have the periods, those performance moments, as you call them. And then in other times, I’ve got to take it a bit easier. So I can recover. Is that what you’re
Andrew May 22:02
Yeah, absolutely. Taken it a bit further since MatchFit that was the genesis of this thought. But if you look at your year, look at a calendar, there’s two components, which have really influenced this one is having kids, I’ve got four of them. So there’s something called school holidays. So school terms go for 10 or 11 weeks, unless if your kids are at private schools, you pay more money and they’re at school less, think about that. It’s like a Seinfeld episode. Let’s say you go hard for 10 or 11 weeks, and then you have holidays, you might be able to take one week, five days. So you downregulating then go hard for 10 or 11 weeks, and downregulate. So that you understand as a parent with a school term. Second one was from working with companies like Comm Bank, at the executive level, it’s called a corporate reporting cycle. But every quarter, they do reporting, so they have a board meeting and then wrap out that quarter, and then a lot of the execs downregulate for a week, so And those two patterns are in sync Gene. So for anyone who works at the higher level, and if you have kids, or if you just understand the education cycle, it’s been built in on sustainability, where we stuff it up, because we go hard for 10 or 11 weeks. And we think more is more. There’s a term in the military and I’m blessed to do a lot of work with the Navy now. It’s slowing down in order to speed up. Yeah. So you’re down regulating you’re giving your body and brain chance to recover. And then you’d bounce back up. So with the podcast, as an example, my podcast Performance Intelligence, we do 10 episodes, yeah, four times a year. And in between the two weeks, we down regulate and have a break. And then I have summer off. Now I know I can do that podcast for years. But with the workload and other stuff I do. If I was punching out a podcast every week, I’d find it too much. So that’s an example where I’ve set up the operating rhythm of the podcast, to our business operating with them. And it works. Yeah.
Tim Hughes 23:59
And then you’ve got that on a micro level as well on a daily basis that you’d still need to down regulate on regular building habits, I guess into into your day. So you can do that on a in a 24 hour cycle.
Andrew May 24:11
sounds like the personal trainer physiologists coming out of you there Tim. So you gotta go macro. So go, Yeah, your quarterly rhythm. And then there’s a monthly Well, there’s an annual rhythm. There’s a quarterly a monthly, a weekly and a daily. So let’s just bookend we’ve done the big, big annual, then every day fully in a couple of moments to just help you even micro recovery. And you can do it in 30 seconds or three minutes. That’s all you need, anyone listening to this who’s too busy to do some activities for 30 seconds or three minutes. You’re You’re fooling yourself, and you’re operating inefficiently. If you don’t build in some moments to just switch off and then go again
Tim Hughes 24:53
It’s a case of prioritising then the importance of this can’t be overlooked but too many times I’ve done it myself, as I’m sure you have where you’ve overlooked it in the past, and you just keep burning at both ends. And before you know it, you’ve run out of wick.
Gene Tunny 25:08
Yeah I mean, what I’d like to ask Andrew is, does this apply to all businesses? Because there are some businesses like you think about investment banks, there’s almost as expectation in investment banks that you just work. You’ll do all these all nighters and, and just work yourself to death almost. And there’s a real sort of macho culture in some of these investment banks. Can you do that? Is that something that’s, I mean, obviously, it’s not sustainable. But I’m just wondering, like, what sort of advice do you give people? Do you advise that look, you just got to try and get rid of that culture in your organization’s because it’s not healthy? Or do you recognise it in some places such as investment banks, if you’re trying to get a deal? Together? You’re doing due diligence on a big deal? Would you advise? Okay, you can do that? Sometimes, but then you do need the brakes. I mean, how do you? How do you balance that out? I mean, are there times when you do have to act in that extreme manner? Or work? Really, you know, do an all nighter every now and then?
Andrew May 26:10
It’s giving me the curly questions like that aren’t you? Let’s answer that on three levels. Yeah, let’s answer that on science. Let’s answer that on outliers. And let’s answer that on money, the big M. Yeah. Science shows the majority of people need about six and a half to seven hours of sleep. Yeah, science would show that most people can probably work 45 or 50 hours a week, if they’re engaged and get recovery, and they’re going to be sustainable. outliers and working with some CEOs shows that that’s not for everybody. Some people don’t need that much sleep. But if I look at those names, you mentioned earlier, Matt, Nick and Shelley they all prioritise recovery, and they are all wonderful students, I think there’s no, no surprise that some of the execs I work with who perform at a higher level, when you look behind the scenes, you’d be amazed some of your listeners would be amazed the detail at which some of these people have gone into understanding nutrition, and personalising Tim, their nutrition based on their profile. And they understand heart rate variability, they understand terms like vagus nerve, all these big technical terms, but they get it, one they know. But then they know how to use it. And that’s the experience part. So yeah, I’ve worked with some, and I think to be a CEO of a large publicly listed company, or a big private or a startup, you’ve got to be a little bit deranged. And I mean that with respect, because you’ve got to be super passionate, you’ve got to put any notion of balance, and I don’t like the word balance, but you’ve just got to go, I’m going to pour my heart into this and do 70,80 90 hours plus, and do that for an extended period of time. And that often leads to the third one. And if you’re going to do that, and make 5,7,8, 10 million a year, and some of the people I work with, I’ll say, but what you’re going to do, I’m going to help you, you can’t do this for the rest of your life. But if you’re going to retire and have 20 or 30, large in the bank, go for it. But just make sure you don’t do too much damage now. So that’s why I’m a realist coach, I’ll look at right What does science Tell me? Where are you there? What are your physiological points? So what’s your psychological capacity? And then what’s the upshot? Because we’ve all seen people only focus on the money and then they burn out. Yeah. And that’s a reality. Dr. Tom Buckley, who co-wrote MatchFit with me, we work and we have worked with a number of execs over the years, who’ve pushed themselves that hard words like downregulate words like operating rhythm words, like mental skills, words, like you know, using wearable tech. Words like energy balance, they think it’s a crock of shit. But they get to a stage where then they actually have to leave the career they’re in. And the research shows there’s no practical experience, because they’ve gone their heart. They’ve cooked themselves that much. There’s no going back. So at times during the year, I’ll go hard. Part of my job is keynote speaking. So in February, mid year, and October, November, I’m for sale, like I’ll be on planes, I’ve been overseas, as well. So if I’m complaining end of October, I’m so busy, I’m so tired then get a new job. So I can do that three times a year. So I now know what I need to do to get up for that. I then recover. But then I drop intensive in the rest of the year. So that’s that experience working out. What can you do? How hard can you go? And it’s a real art. There’s science in it. But then it’s an art.
Gene Tunny 29:37
Yeah. On the wearables what sort of wearables are you talking about? Do you mean a Fitbit? Is that what they are?
Andrew May 29:43
Yeah, look, I wear a Garmin and I’m aligned to Garmin. But whether it’s a Fitbit or Garmin, a lot of people are wearing the whoop bands as well, which is really good on heart rate variability. What have I missed on this Timmy
Tim Hughes 29:58
Oura rings, I don’t know if they have the same capability as those ones you’ve mentioned, but they look cool.
Andrew May 30:04
They do look cool look, and they’re all they’ve all got different pros and cons. Gene what Doctor Tom and I look at on wearables, there’s a couple of key metrics, when I’m working with a high end exec one is, I want to know their resting heart rate, that shows me how well their body is adapting to the physiology or to the demands of their role. Also, when you’re sick, or stressed or inflamed, your heart rate will be up. So you can see that there’s something wrong in the system. And then you know, to back off a little bit, the second one I’ll look at is sleep. Now, the wearable devices aren’t super accurate, but you get a pattern around that. Yeah, we’ll look at exercise and minutes, because we all sit down way too much. So the actual time and exercise we need is a hell of a lot more than it was because we’re all so inactive. I’ll then look at heart rate variability, if the device has one. And then to two simple ones. And you can go off and get a DEXA scan, which Tim you and I do with our clients. But you can also just know, what’s my weight? And what’s my waist. So personally, I know I want my weight to be at around 90 kilos. And my waist at 85 or 86 centimetres. And that’s it. I’ve kept that there for years. So if my waist balloons up after Easter, after a holiday after whatever, you then know what to do, just to get back to that setpoint.
Gene Tunny 31:25
Right. What’s this thing? A DEXA? Scan? Is it did you say?
Andrew May
Yeah, so Timmy what does it stand for?
Tim Hughes 31:29
That’s a very good question that I can’t answer, right now! I’m gonna put it in the show notes. It’s alright, Its body composition. But it’s the most accurate way. Because it will give you the most accurate measurement of body fat bone density. Yeah, it’s a little bit loose on muscle. Because I did this on a I did a 21 day keto challenge for myself last year. And I was really surprised at how much muscle you can lose on a restricted calorie keto diet. But I challenged myself to do it, I lost almost 10 kilos. And I was so surprised. After the first week I did an extra DEXA scan, I threw another one in, you shouldn’t do too many. But I’ll put an extra one in to see what was going on. But it will measure your water, you know, your hydration levels. But you hold a lot of water in your muscles. And so it’s a little bit, it will come over as being muscle loss. Whereas in fact, it wasn’t quite that dramatic. Yeah, because as soon as you then recharge with carbohydrate, you absorb more water.
Andrew May 32:32
The big the big thing that does show to two or three metrics I like with a DEXA. And I’ll again tell my high-end execs, go get a DEXA done every six months, bone density is really important. So it picks up bone density. And I’ve had a number of Mamils but cyclists to cycle hips, but they’ve come back and their bone density is quite poor because they’re not getting that impact. So that leads to change in their programme. The middle aged men in lycra who scare women and young children at Coffee Shops
Tim Hughes 33:01
everybody really
Andrew May 33:02
beautiful. themselves. So bone density from a DEXA. fat mass is a big one, because you really get a true fat mass. But look, you don’t need to do that. Go do the simple ones, what’s your weight? What’s your waist and get a get a set point.
Tim Hughes 33:18
And that that measurement, you mentioned is absolutely right like that single measurement around the waist will tell you everything else that’s going on. So if it’s going out, you know that everything else is going to be increasing somewhat. And it’s it’s the canary down the mine as well. It’s the first one, if you start to put weight on, it’s the first place to for it to show
Andrew May 33:38
and why that is in my five for those base building blocks. You got a lot of really intelligent high end cerebral men and women listening to this podcast and advice. So tell me about your business KPIs, or we’ve got this metric. And we know customer side of this and here’s our market penetration and don’t just flip that back and go, Alright, what’s your resting heart? Why should I know my resting heart rate? Well, that shows how you’re responding to stress. Stress is awesome. As long as you have recovery or parasympathetic, what’s your exercise minutes, so we just really turned the language back here’s your KPIs to run project you, your body, your brain and make that efficient, and then business and everything else revolves around that rather than Oh, shit, I should look after myself. Do it first. Yeah,
Tim Hughes 34:27
I wanted to just about first of all, thanks for sharing your story. I really appreciate that. Because I know that that’s a big thing I didn’t realise about your cancer. So yeah, thank you for sharing that. And also, I wanted to expand on the, with the CEO, for instance being trained with a shareholder, a company, etc. Have you come across this at all, or is it something that’s been mentioned, where shareholders should be invested if you like in a healthy executive team? So for instance, if a CEO has been trained, if I was a shareholder I be quite happy about that. And don’t want tobe health-shaming anybody who’s not being trained or not being coached. But certainly I don’t know if there’s any stats, or if there’s ROI or data on this, where shareholders or companies can see a difference in the performance of the company with the performance of their executive team, or the health, the health and performance of their executive team.
Andrew May 35:22
It’s a dream that I have a dream, I think every allied health professional has is to show that when executives, physically, psychologically emotionally, every other ally, socially healthier, there’s a return on the bottom line. The data from US is, is the main data we look at. But you’ve got to understand the majority of US companies are self insured, so they need that data. So we don’t unfortunately have that in Australia. Tim, I’ll give you the flip side first. But I just used to think it’s all about being healthy and fit. But you could have a really healthy male or female executive, and they are narcissistic, toxic, aggressive arsehole. So where does that fit? Are you better to have someone who has gotten really good emotional regulation and good understanding of others that EQ and we look at social contagion theory, how you show up this how others around you show up. So if you show up in a nice state, and you’ve got this open or growth mindset, and you’re nurturing talent, others will do the same as well. I think if you get the balance of both, if you have health as a basis and I’m biased, right, I studied Ex Phys for years, I’d spent time with lots of sports. I absolutely know that when you have a physical base, and Dr. John Ratey, wrote about this in his book, one of the first neuroscientists to show, if you’ve got a physical base, you’re going to think better. But I just want to balance that out as well, because I have worked with a number of men and women who you know, they don’t have the body fat they want or they may not look in the mirror and flex, but they’re a wonderful person. And they’re really good at community and they got amazing citizenship. And I think getting the blend of both is optimal
Gene Tunny 37:06
This is a question I’m interested in, what level would you want to get a CEO up to? I mean, you know, you want to get them to a weight where they’re not overweight, at least. And there may be an ideal weight they’re shooting for but I mean, I’m just I’m just wondering, they don’t need to get to an elite level of performance athletically, do they or in the gym?
Andrew May 37:27
No, no, they don’t some some I work with do but I just say anything now you’re getting into territory, which is more around your goals, performance, your crazy brain, and it’s not actually going to help you. And it can be detrimental. It can also be really boring, like no one wants to sit next to the age group triathlete, vegan champion, dinner party, and they’re going vegan and not having dessert like it run away from those people. They’re boring as batshit. Right. So you also got to be normal around this. But two factors I want all my executive chasing. And this is linked to longevity, Dr. Peter Attia I’ve got his book up here, Outlive, which is a great book. And the two factors and then Dr. Tom and I’ve been saying this for a number of years, Attia backs that up but he’s just so articulate, you want to be chasing one, VO2 Max and maximum volume of oxygen per millilitre per kilogramme per minute. And a lot of the watches will tell you that, two, if you want to chase muscle, lean body mass. So on all the programmes that I do, and Tim, I can’t help myself, I still get on the tools a bit. But I cut out the long chunked bike rides, you don’t need to do three or four hour bike rides. And in fact, that has some problems around that. But do a shorter sharper one to get the VO2 max up, but then get in the gym, and lift. So if you’ve been doing that blend between some short, sharp exercise and some weights that’s shown to really help with longevity. Now, another marker on this, which is not aesthetics, it’s more around science is biological age. So with my business, StriveStronger where you have and a lot of people have a biological age, but Dr. Tom Buckley, Associate Professor at Sydney Uni and some leading neuroscientists, psychologist, physiologist, behaviour experts, we’ve come up with a score. It’s the live life score, which is a biological age, and a mental fitness gauge on the biological age and Timmy you and I’ve been doing this stuff for years. I want all of my clients to be five years younger. Let’s say you’re 42 your birth certificate 42 I want your biological age to be 37. And that buffer in physiology allows you to have extra capacity, extra energy for demands you don’t know is coming. Who was ready for lockdown and COVID No one. So if someone had a biological age, 10 years older, and they’re tired, and they’re in inflammation, and they don’t have energy And you whack on a change like that, you’re not going to respond really well. So the two metrics we want to chase VO2 max, and we want to chase lean body mass or muscle, that we use a biological age score, and that gives everyone a really good metric. Are you five years younger or not? And I get people that are that may look like big bones or you know, German heritage. Just be five years younger. Yeah. And then we’ll have a chat.
Gene Tunny 40:25
So VO two max is the best thing for that interval training, high intensity interval training, right?
Andrew May 40:30
Yeah. Yeah, within a certain range, like you don’t want to go if you’ve been doing nothing, don’t get a 400 metre now. Because you’ll keel over.
Gene Tunny 40:37
Yeah. And what I like about your, your work, Andrew is you you’re a big proponent of people just getting out and walking and going, you know, getting your 10,000 steps a day in, I think that’s really good.
Andrew May 40:48
I love the word pulse. But we’ve got a pulse, train hard, high intensity, that’ll get your VO to max up, yeah. But then you’ve just got to walk. You should eat food, and good food. And Tim can tell you all the details on this, but you also should fast. If you’re a male listening to this, and you’re 40 to 45 plus years age and you’re not fasting, you’re doing yourself a disservice because it will do wonders for taking off fat wonders for lean body mass wonders for your hormones, as well. Which should get hey, like I’m a big proponent of regular sauna. And the right person as well can make sure your heart’s okay, but cold, cold water, and we should stress the body, which should recover the body. So the teaching and Gene it’s taken me a while to realise this. It’s the range go hard, but then down regulate, eat food and then fast. Because what so many people do under stress is we’re in standard linearity. There’s no high, but there’s definitely no low.
Tim Hughes 41:50
And with with that comparison, that’s where energy comes from having that comparison, like you know, when you’re talking about being on that level, and it just flat, nothing happens. But when you down, regulate and recover and all those things. So more and more, I can see that. It’s what people bring the energy that people bring to work or to relationships or to whatever they do. It’s all about energy. And what you’re describing there is perfectly describing energy management.
Andrew May 42:17
You know, this from your training, but the energy exchange is carbohydrate plus oxygen. Yep. Which gets water and carbon dioxide. So C6H12O6 plus O2 leads to Co2 plus H2O
Tim Hughes 42:29
I wouldn’t, I wouldn’t quite have recalled it like that. But
Andrew May 42:33
but there’s physical energy. And that’s just your body’s fundamental basic. And if you don’t work with that, from a physical point of view, every other energy source is going to be interrupted. And then you’ve got the psychological and emotional. And it’s all interrelated,
Gene Tunny 42:49
right? Love it. Andrew, we’re coming to the end of the time. So just want to ask, what coaching do you offer? And how can people get in touch with you?
Andrew May 42:59
I coach the high end. So executive coaching. And I don’t have a lot of vacancies on
Gene Tunny 43:11
online as well, yeah,
Andrew May 43:13
I allocate half a day a week to coaching and there’s a couple other, we’ve got to start soon. And then why I do half a day because I love coaching. But I do a lot of other things as well. So I’ll just try and keep it to half a day. But we are launching a group coaching programme as well, which is calledpperformance intelligence Mastermind. So that’s going to be a 12 month programme with a quarterly focus. So q1 is all about getting that fit. q2 is about working smarter, and being productive. q3 is around mental skills. And then q4 is around habit stacking. Yeah, so if anyone wants to find out about that, they can go to my website, Andrewmay.com. And you’ll be able to find the details there. And I’m looking forward to that. It’s taking a lot of what I’ve learned and getting some other people in my business to really try and scale. So that’s a nice challenge we’ve got is to take the message out to a larger group. And I see a lot of the Americans, especially doing masterminds. And I’ve thought for a while. I’ve got to do that. And I’m doing a couple of our family business forums using this format, and it’s have you done group coaching, like that Tim it’s amazed me mate the results. And in fact, as good similar results as you get one on one.
Tim Hughes 44:24
Yeah. Now I’d like to talk more about that. I mean, I know you’ve got so much good stuff I’ve seen with MatchFit, which is an excellent book that I recommend people get in and get a copy. And you’ve also got an eight week programme with MatchFit as well that people can sign up to so that’s for anybody Maysie is that right individuals, whether you’re executive or not.
Andrew May 44:46
Yeah, MatchFit is one of those absolute basics to get physical fitness and psychological fitness. And so that metric now the Live Live Score is aligned to that. So your biological age and making sure you have that psychological flexibility. So yeah, the MatchFit book is a good start for people as well, that’s, it’s 30 bucks a bargain, it’s a lot cheaper than the coaching programme,
Tim Hughes 45:05
It’s a bargain. But I have to say like, it’s the basics where people often slip up, you know, like, it’s, there’s so much good information out there, there’s so much it can be overwhelming with the amount of information that’s there. And quite often I think it can distract people from getting the basics right. You know, you get those, those simple things, right. You know, how you eat, how you move, how you sleep, and how you connect all the things you talk about. So that MatchFit programme, the eight week one, I think, is very accessible for anybody. But yeah, hopefully, if anyone’s out there listening and you, you want to get in contact with Andrew, for some executive coaching, you’re gonna have to be quick by the sound of it.
Andrew May 45:45
Or just jump into the mastermind. Yeah,
Gene Tunny 45:46
put the link in the show notes to your website and your podcast. Andrew, Andrew, May, thanks so much for your time. We’ve really enjoyed it and appreciate your insights. Thanks so much.
Andrew May 45:56
Yeah you’ve asked some good questions. So you had me dancing a bit. So I appreciate those as well.
Tim Hughes 46:01
Thanks Maysie really appreciate it good to connect again.
Andrew May
Yeah ditto
Gene Tunny 46:11
Okay, Tim, good to be catching up with you again, after our conversation with Andrew May.
Tim Hughes
Yeah, that was really good. I really enjoyed it.
Gene Tunny
Yep. Thanks for setting that up. I thought that was that was terrific. He had a lot of really good things to say. I thought,
Tim Hughes 46:27
yeah, I mean, he’s at the top of his game with the position he’s in have an understanding you know he talks about the link between physical and psychological well being and executive performance and elite performance for athletes, and he has a CV that is beyond compare, I think, certainly in Australia. So what he brings to that whole conversation, all those different aspects about what we as humans go through with our needs, and what affects performance and our health. He’s in such a good position to be able to comment and coach on all of that.
Gene Tunny 47:04
Yeah, absolutely. What were the main takeaways for you, Tim?
Tim Hughes 47:07
Many, and it was great, because I hadn’t been in touch with Maisie for a while. So it was great to reconnect. And I’ve followed his podcast for the last year or two. And he talked about his, those five elements that he used in his coaching. So I’ve made a couple of notes here. So we’ve got the operating rhythm for the first one, getting the work and the year in balance. And he talked about that in terms of well as like we do with schools, and they have their terms and, and sort of following that. And that made a lot of sense. I think breaking it down into different chunks. And everyone can relate to that of you know, because that that feeds into, you know, some of the other things that he talked about, where you’re not necessarily going at the same pace all the time. So there’s a light at the end of the tunnel, energy balance, he talked about putting a plug in the bath. So yeah, stopping draining energy first. So instead of just looking to see where you can boost it, the first step was to stop draining energy. And again, everyone can relate to it, you know, you can sort of see it, and sometimes you need it pointing out to all of us, I think can benefit from having someone to we get into the rut and the habits of doing things which are probably not to our advantage.
Gene Tunny 48:22
Over indulging, drinking too much alcohol is no good for your performance. Yeah, yeah. staying out late. So yeah, I think that’s that’s a good point. You want to stop the things that are draining your energy? Or it could be a bad relationship?
Tim Hughes 48:37
People? Yeah, absolutely. You know, and work practices, you know, so many different things. And I think it is that thing of, you know, sometimes I mean, we do it ourselves, you know, a lot of us, I’m sure self correct, you know, we sort of put your head above the parapet every now and then and see things a little bit more clearly. And then before you know it, your head down, bum up, just getting on with the work at hand. And so you need those sorts of times above the parapet to sort of get a clearer view of the direction of everything. And, you know, like I said, we do it ourselves, we self coach, but you can see where somebody else can have that clarity, and help us towards getting these operating rhythms and energy balances, right? He talked about downregulation. It feeds in Psychological detachment and parasympathetic activation.
Gene Tunny 49:24
Yeah, yeah. I had to ask him what parasympathetic meant? Yeah, that’s part of the downregulation, isn’t it?
Tim Hughes 49:33
It is, I mean, like, it’s these natural sort of balances that we have, you know, where we are responses a largely, you know, we have so many primal responses where, you know, stress levels can hit the roof and all of these different things that gets talked about a lot, you know, and in our history, we would have had life threatening situations that we would have come across where all those stress hormones and the cortisol and adrenaline all those fight or flight responses had their place. But we get that in front of a computer nowadays. So the responses through the body, the hormonal responses are still there. And the stress we feel and the stress the body takes on, and the ill effects of that are far greater than, you know, a simple sprint, simple sprint from a tiger or whatever. But you know, it’s not as life threatening as it is. And so getting those responses in place, and being able to recognise or manage those stress responses to a healthier level, you know, because we need stress a certain amount of it, but we don’t, we don’t want to say that heightened levels. Yeah,
Gene Tunny 50:36
I thought that was interesting for the executives. So what I was trying to get out of Maisie is how do executives apply this and it’s not as if he’s telling the executives, you got to chill out right now, or you’re maybe I don’t know, exact language he uses, but it’s not as if he’s saying that, okay, this, you know, intense workload you’ve got, you should take it a bit easier. He does recognise that CEOs to get that high performance, there is a period in which they do have to push themselves, but he’s saying you got to make sure that’s balanced out later on somehow. Yeah. And it could be, you’ve got to look forward to a break in the future or, you know, a few years. Because saying, at that level, if you’re going to perform at that level, you can only do it for a few years or not for an extended period. And then you’ve got to be thinking about when when you do get a break, or when you do something, when you do you’ve got to look forward to that time when you can down regulate. So although that was good, yeah.
Tim Hughes 51:36
It’s that thing of like, you can’t sprint constantly. And if you do, then there’s, there’s a payoff for that, you know, there’s a debt to pay. Yeah, yeah. So it is that thing of like not none of us are bottomless pits that we have to manage our energy and our time well, and, yeah, one of the other things, number four, on his list of five was mental skills. We didn’t go into too much detail, but I guess it was covered with the general conversation, you know, he’s talking about resilience and the things that we can put in place, the sort of, you know, the things that we can control, and, you know, being able to, I guess, put all of this into practice, you know, because to, to be able to apply all of these different areas, you need to have the mental capacity to be able to keep it in your day and to, to make it work to make sure that you give it priority.
Gene Tunny 52:27
So that journaling and meditation was that what was that under mental skills
Tim Hughes 52:32
didn’t go into that in detail, it would be I would say, yeah, that’s part of the tool box to increase your mental skills.
Gene Tunny 52:39
That might be downregulation, too.
Tim Hughes 52:42
I think this is where they cross over we’ll have to get Maisie on for another chat. But it but it’s that thing of absolutely. You know, you can imagine, to be able to keep it all going to be able to get your head around everything that you need to do well. And resilience is definitely a big part of that. Yeah. And the fifth one was wearable tech. And this is a fascinating area, because this is changing very quickly. In some levels, it’s gone beyond the basic pedometer that the first wearable techs really were. I know, I listened to something from Will Ahmed the other day, he was the guy who started Whoop, yeah, he talks in terms of this wearable tech being version one was really the pedometer, version two is where it’s at now, version three and four, like, the more data that it can give us, and this is what Maysie was talking about was like, you know, getting data KPIs using, using this information, this technology for our good. So it’s not just smothering ourselves in more detail, it’s actually using something that can be relied upon to be able to further what we’re doing or to see that we’re on the right track. And also to show that we need to downregulate this as part of where the current version of wearable tech is, it’ll tell you when to That’s enough where you need to slow down.
Gene Tunny 53:57
So I mean, ultimately, what are we heading towards? We have all of these monitors in our bodies or nanobots or whatever, and they connect to the device, neural link and it connects to our mind and will be able to tell us about our how we’re feeling how our brain activities going, what parts of the brain are firing, how emotional we are that day, that’s
Tim Hughes 54:17
you’ll have a direct line to Elon, you’ll be able to speak to any point, I think,
Gene Tunny 54:22
just on Elon because I mean, one thing it’d be good to talk about is what you took out of it in terms of firm performance because this is an economic show. So I know like this episode, we’ve gone a bit into health and fitness. We’re not really a health and fitness podcast or economics podcast, and that’s the angle I was interested in. And I guess what I found fascinating from talking to Andrew is just the dedication that some of these CEOs have or just how much they’re optimising. Right. I guess it makes sense given they’re running, you know, billion dollar companies or companies with hundreds of billions of dollars. In some cases, it makes sense that they’re doing this. But yet, I was fascinated by Andrew describing the extent to which they’re trying to optimise all these things. And you know, seeing someone like Andrew and in what he knows and what I think he’s talking to them about, which is the stuff you were going on about those five things. It’s really Yeah, you think, yeah, that’s how these guys and girls stay at the top of their game, and they can perform at that high level. Now, the next thing I want to know is to what extent that go turns into firm performance. And the evidence on that is a bit, you know, it’s early days, it’s not that clear, I found one study, it was a University of Cologne working paper. So German working paper, and they looked at whether the physical fitness of CEOs is relevant to firm value, and they looked at whether CEOs completed a marathon, how many marathons or I think was marathons, maybe half marathons they they finished in that year, and whether that can be related to firm performance. And they they found that it had a positive impact. But look, it’s one study, it’s a working paper doesn’t look like it’s been published or peer reviewed. But my conclusion based on looking at the what’s out there is there’s still not a lot of evidence or data on this. I mean, it’s, it’s clearly good for you as an individual, but does it translate into into firm performance? And is this something that the Board should be monitoring? Should they be telling the CEO? Look, we need you to work with someone like Maisie? I think that’s an important question that you asked that question, didn’t you
Tim Hughes 56:31
it’s along those lines. I mean, because it was about ROI. Yeah. And it’s one of the things is because this has already been, Maysie has been looking into that, anyway. But it’s the hardest thing with it is to get good data pre. So it was something we’ve been looking into for a while I know. And so this might be a good opportunity to mention, if any of the listeners out there have a business that they’re interested in doing a study on. Because the most accurate way, or one of the most accurate ways is if we can get data before intervention. And then data after so at least we’re working with the same test group.
Gene Tunny 57:07
Yeah, and you want a treatment and a control group. So you have to ideally, you’d randomise it in some way who goes into the treatment and who stays in the control?
Tim Hughes 57:16
And so those sorts of things. No, so we’re, we’d be really interested in running those experiments, if you like. But at the end of the day, it’s about what makes a difference. And I think it would be fairly safe to say that there’s going to be a positive impact. I mean, that then that’s just from evidence I’ve seen in the work I’ve done. Andrew May, will be able to talk to you about evidence he’s seen. But it’s difficult to put it down on paper as being like really, as an ROI. That’s something for the accountants to be able to say, okay, yeah,
Gene Tunny 57:48
I think it’d be, it’d be difficult to actually identify it. In terms of firm value, particularly given there’s so much else going on that affects our particular businesses going, it’s gonna be really hard to just tease out the impact of, you know, health healthier CEO, but I can see the mechanism. I mean, if someone’s healthier, and Andrew was right there, there’s good evidence or good evidence from what’s the literature, physiology or whatever the whatever the discipline is, is medicine, there’s good evidence that better health if you’re physically fit, or that the healthier you are, that translates to your mental well being, and your your emotional well being. So there’s definitely a link there. And I can see that would lead you to make better decisions. Because when you make poor decisions, when your judgment’s impaired, it’s when you’re not sleeping properly. That’s when you’re a bit rundown. And that’s in the workplace. I know, that is when you make poor decisions, and part of getting back on track, if you’re ever in that sort of that slump. If you ever have a rough patch at work, part of it is actually improving your health and fitness. So I know that from personal experience.
Tim Hughes 59:02
Absolutely. I mean, we’re all human at the end of the day. And there is plenty of good evidence to support the positive impacts of exercise of eating well, of getting enough sleep. All these basics that are really within reach for most people is really more of a daily practice that needs to be implemented. And it’s available for all of us. There’s nothing really super tricky with a lot of this.
Gene Tunny 59:26
Yeah. And they reinforce each other, don’t they? So if you exercise, the more you exercise, the more you move that helps you sleep. It also encourages you to eat better as well doesn’t you
Tim Hughes 59:37
I think sleep’s foundation of the whole thing because if you get a good night’s sleep, you can do all the other things well, but is that thing about just keeping on track with a simple daily practice? Something I’m fascinated with and doing more work on with the work I do. It is it’s the benefits are really well documented for what that is, and if anyone’s concerned about, not concerned but interested in seeing what impacts it have. Try it, you know, because we’re all test group of one. And you can see yourself, you know what sort of difference it makes. And then you can correlate what that might mean to a business or a CEO. And it can only be positive you would imagine.
Gene Tunny 1:00:16
Oh, mate, yeah, it’s obviously it’s been working out for you. I mean, you got the high praise from Maysie at the start of the conversation. So he was impressed by.
Tim Hughes 1:00:27
He’s a very kind man. Might need to check his eyesight.
Gene Tunny 1:00:32
I think that’s great. Any final thoughts before we wrap up this wrap up?
Tim Hughes 1:00:37
Now? I really enjoyed it. And it is an area that I’m a part of that. So I was I was really looking forward to that chat. And I got a lot from it. Yeah. Looking forward to round two, I think they’ll be a round two at some point in the not too distant future.
Gene Tunny 1:00:51
Yeah, I think I’d like to look more at that evidence and just do a wider review of what’s out there. And what might be underway. What was he think this this should be an active area of research? I would say? Because it’s such a it’s such a fascinating question. And, and I think people in management, people in economics should be interested in it, because it looks like an intervention that could be highly cost effective. If you can get a coach for your CEO and have them performing at a higher level. And they can make better decisions, provide better leadership. And that could have a big impact on bottom line, potentially. So I can see the mechanism. Just, I just like to see some data. And yeah, I think it’d be difficult to tease it out. But I think the links there the mechanism, the mechanism is is established. Just need to see some data and figure out a clever way to demonstrate that link.
Tim Hughes 1:01:49
If you were a shareholder. What would you think if you could see the CEO or the executive team were into their health and valued their health? How would that
Gene Tunny 1:02:00
makes you feel better? I think and I think if you look at the current vintage of CEOs, say of the banks look at someone like Matt Comyn, who Andrew works with fit Yeah, young guy, well, Gen X guy. He might be my age, or just maybe just a bit older or younger, younger actually might be younger, actually. Yeah. And there’s also Shane Elliot, ANZ. I’ve worked with ANZ. I mean Shane’s superfit, right, he’s in good condition. So I think they are and I think a lot of them are and they’re probably healthier than the, the generation before them. And certainly the generation before that. I mean, there’s that generation who were born before the war, or born in the early part of the 20th century, who dropping dead at 50 in their 50s and 60s because of overindulgence.
Tim Hughes 1:02:49
So the Don Draper effect.
Gene Tunny 1:02:52
Yeah yeah I mean, you’re there’s quite a bit of that. So yeah, I think the modern CEO, they’re probably healthier. And yeah, there’s evidence from Sweden, this is one of the studies I’ve found, that I’ll link to in the show notes. If I remember correctly, it looks like the the CEOs are actually are actually healthier than the people working below them. Right. So there are a lot of fit CEOs out there. And they can be healthier than the Yeah, the CEOs are often healthier than other individuals of their cohort and gender. They also suffer less from mental diseases. And, and better make sure I’ll, I’ll check exactly what that is and put it in the show notes. Yeah, but that’s what I found interesting about that Swedish study, it looks like the CEOs are reasonably healthy to begin with. And then Andrews work is about getting them up to a higher level.
Tim Hughes 1:03:45
Yeah, I mean, I think the correlation with people’s own capacity for discipline probably plays quite a bit, in that. There’s certainly discipline in being healthy and staying healthy and doing the things that need to be done. And so I guess there’s a certain amount of discipline, although there’s many stories out there, I’m sure. But for someone to be a CEO, it’s a fairly, you’ve got to play yourself pretty well for a long period of time. So it should go hand in hand that the people who managed to get to the top of the executive pyramid would also be people who would perform well. And in health.
Gene Tunny 1:04:23
Absolutely. Okay. Tim, I think that’s a good place to end. Thanks so much for setting up that conversation with Andrew. And, yeah, we’ll catch up again soon. And hopefully, with Andrew sometime in the future.
Tim Hughes 1:04:37
Yeah. And in the meantime, if anyone out there is interested in doing a study, reach out to us, let us know.
Gene Tunny 1:04:43
If you wish to be experimented upon, let us know. Okay. All right. Thanks. Thanks,
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Credits
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Can we get people to work harder and perform better if we make their pay performance-related – e.g. with performance bonuses or commissions? Does this work? What does the evidence say? We know that people respond to incentives, but, as Gene Tunny and Tim Hughes discuss this episode, getting those incentives right can be tricky.
Transcript: How performance-based pay can motivate employees, but there are risks – EP177
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:06
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, Tim Hughes and I chat about performance related pay, can we get people to work harder and perform better if we make part of their pay performance related? Of course, if you don’t perform at work, you can get sacked. So your pay does end up being related to performance in one sense. But what we’re talking about here are such things as performance bonuses and commissions. That is where you don’t just get a regular predictable salary, but part of your compensation is at risk. Does this work? What does the evidence say? We know that people respond to incentives. But as Tim and I discuss this episode, getting those incentives right can be tricky. Okay, let’s get into the episode. Please stick around to the end for some additional thoughts for me. Tim Huges, good to be chatting with you again
Tim Hughes 01:30
Gene, good to be here.
Gene Tunny 01:31
Excellent Tim, I thought it’d be good for us to have a quick conversation on performance related pay. I’ve been thinking about this following on from this whole debate between Steven Crowder and the daily wire, which I talked about with John Humphries on his Australian taxpayers Alliance Econ Chat, earlier in the week, and I thought it’d be good for us to have a chat about a related issue, which is performance related pay I got starting to think about this. Well, when John and I were talking, we were talking about well, does the actual form of the contract matter? Or is it just all about the dollars that are being paid? Or that they expect to earn out of the contract? I mean, obviously, the money is important, but how do the contractual terms affect the amount of effort that you put in, in your work? And so I was thinking about that in the context of the debate between Crowder and daily wire, and then it reminded me that I should cover this issue of performance related pay on the programme, because I think it’s an important, an important issue.
Tim Hughes 02:36
Yeah, sure. It’s an interesting area for sure.
Gene Tunny 02:38
Yeah. I mean, did you have any thoughts on that whole crowder and daily wire?
Tim Hughes 02:41
I’d never heard of it until you mentioned it. So I didn’t even know if, so he’s a comedian, that guy?
Gene Tunny 02:47
Yeah. Yeah. So he’s on the right wing in the US. He’s more of the Magga type, Crowder, whereas the daily wire and more of the traditional Republican, and I think Ben Shapiro was originally anti Trump. So yeah, the different parts of the conservative movement in the States.
Tim Hughes 03:09
I think I know now, I haven’t heard of him. But as we often talk about like, it’s it’s good to be exposed to different areas and different views. So yeah, looking forward to hearing about it.
Gene Tunny 03:23
It’s just all over YouTube and social media, people are commenting on it and say, John went through it. And John’s view is that well, all they’re arguing over is the amount of money involved. And it’s not necessarily about, you know, the concern Crowder had was that daily wires just doing the bidding of big tech.
Tim Hughes 03:42
But so what was what’s the what’s the juice? Like? What was the story? Between those two guys? It was a it was a contract. Yeah.
Gene Tunny 03:49
It was a contractual dispute. Well, they were trying to recruit, Crowder to their platform, and they offered him $50 million over four years, but the payment that they have for you, yeah, but what they would pay would step down if he was demonetized on different platforms like YouTube and Okay, Twitter, or Facebook, or whatever. And he was saying, well, you’re doing the bidding of big tech. But look, it costs the money. So it makes sense to, to scale the contract down. And so in John’s saying, look, it’s just all about money. These contractual negotiations are just all about money, ultimately.
Tim Hughes 04:26
Just out of interest. So when he says you’re doing the bidding of big tech, what does it mean by bidding? Like, I can understand that, like big tech may affect that income? So if it’s monetized that’s basically the issue. Yeah. But how can they be doing the bidding of big tech? I don’t understand that.
Gene Tunny 04:43
Well, maybe I haven’t expressed that very well. But the idea is that, well, a lot of these conservatives think that big tech is trying to censor conservative voices. Yeah. And so he’s saying, well, you’re just going along with what they want. Alright, okay. I’m accepting that in the pocket. Yeah, no. Yeah, maybe that’s I don’t know. That was his concern. But look, as John said, it just all comes down to money and at what price you’re willing to, to work for Daily Wire and also to give up the IP because he would have to give up IP and the shows that are produced while he was at. At Daily Wire, they would get the copyright in that. Yeah. So yeah, ultimately, it all came down to money, but it did get me thinking well, okay, well, how would you structure a contract? To get the best performance out of a person was daily while we’re designing the contract, they were proposing a contract in a certain form to get the best outcome from their point of view. And then also, as possibly was from Crowder’s point of view, too, because there’s going to be more money available for both if he’s not demonetize, right, yeah. Yeah. I mean, he may think that, well, that’s bad for his brand. Or maybe he’s playing the longer term game. And he’s thinking well, yeah, I mean, I’m all about being edgy. I don’t care about whether I’m monetized on YouTube or not. But then again, he should have appreciated that if he wasn’t monetized on YouTube, then that’s less money overall. So the Daily Wire is trying to design a contract, where it’s essentially trying to encourage him to be monetized or as monetized as much as possible so that there’s more money for them. Now Share, They Share part of that with Crowder, and depending on what the share of the total revenue that YouTube was of the total revenue that comes in from Crowder, he may well have been better off with the deal they were offering, because he was I think they’re only going to dock 25%. Well, they’re going to dock 25% If he gets demonetized on YouTube, okay, I thought this was an interesting case. And it just got me thinking about incentives and how do you structure contracts.
Tim Hughes 06:56
yeah, yeah, it’s an interesting area, because I know we talked a little bit about this. And certainly, from my experience, like, you know, if you’ve got an incentive, as an employee, or if you can give incentives as an employer to get the mix, right is the tricky thing, because you know, you want something that’s attainable, and sustainable. So if it’s too easy to get the reward, you know, the employer can lose out. If it’s too hard, then the employee loses out. So it’s a bit of a fine balance. And obviously, this is used pretty successfully with commission based work, you know, where there’s a base salary plus commission, and they’re usually done over a period of time, so they can get that amount, you know, pretty much right? And some people can do really well with that. Particularly in real estate. Yeah, well, and with salesmen, it’s a big one for sales, of course, of all sorts of industries where no sales are used. And it makes a lot of sense, you know, if you’re a really good salesperson, then you can be rewarded for that. And if you’re not so good, then, you know, you, you don’t get so much. And so sort of a fair way of doing it. So I think now, wherever possible, it makes a lot of sense to have that involvement in the company. You know, that’s, that’s properly rewarded.
Gene Tunny 08:09
Yeah, exactly. So I thought this would be a good topic to, to talk about. So in the great majority of employment agreements, I would think would not involve any performance related pay that there’s really isn’t any incentive there. But they rely upon, well, the incentive is if you do the job, then you’ll keep your job. But if you don’t, we’ll get rid of you. So I guess that’s the that’s how it works, right? And but if you can monitor how people are working, and you’ve got a good, a good eye on that you can, you’re able to properly understand the contribution output and the profitability of the firm. And in many cases, I suppose you can, you can do that. If someone’s working at McDonald’s, they’ve got a sense of whether that person is able to prepare the number of Big Macs an hour that’s required or whatever they need to do. So you can monitor that sort of activity. And in those cases, there’s no real need to provide any incentive, if they do a better job, or if they suppose they will have to meet a particular level of service or or do so much an hour. And if they do more than that, well, it doesn’t really lead to more money or more profitability for McDonald’s because basically, McDonald’s ends up serving everyone who comes in and tries to buy something off them anyway, doesn’t it?
Tim Hughes 09:39
I mean, that I know people who’ve worked in McDonald’s and they seem to have obviously it’s all about systems have completely been the leader in that kind of business for a long time. Many people, many businesses have incorporated, that whole framework of heavily systemized but of course, it means that the expectations of what needs to be done? Pretty accurate, but I think they do have, you know, opportunities to sort of move within McDonald’s. So the scale or the pay scales quite clearly set out.
Gene Tunny 10:12
You’re right. And just after I gave McDonald’s as an example, I thought I better check that McDonald’s doesn’t actually have performance related pay. Because that was just the first thing that occurred to me. But I think most of the people are working there, they’re just going to be getting paid the award rate or whatever it is, or whatever. Yeah, the agreement. But it turns out, it looks like there is some performance related pay. This is in the UK, McDonald’s restaurants put motivation and reward at heart of business strategy. So I’ll put a link to this. This is for the the top restaurants and it looks like they give a bit of a bonus a small bonus in some cases. So each month, all employees in the top 10% of restaurants based on mystery shopper scores receive a bonus of 50 P for each hour, they have worked in a two week period. Okay, so that seems that seems okay. But it’s not related to your individual performance. It’s related to how the whole store goes. And that’s probably not as strong an incentive as if it’s an individual performance pay performance related pay measure?
Tim Hughes 11:26
Yeah, and I guess put put a big part of that, because they work as teams, obviously. So to pick out an individual for having particular performance would be hard, but collectively, for that branch, you know, there might be incentives, if not, with McDonald’s with other similar kind of fast food chains. But I know, for instance, in the states, if you work in hospitality, a lot of the jobs are paid, not very much on the understanding that they’re going to receive, you know, pretty good amount of tips throughout the week. Yeah, because it’s customary and traditional to do it in most places. As I understand over there, I worked in Austria, myself in ski resorts years ago. And that was a big thing. There was you lived on your tips, it was fantastic. You know, it made a big difference. And you could save your wages, which weren’t high, because of it. Whereas in the UK, it was less likely you’re gonna get tipped, you know, you’re gonna be hungry. If you’re, if you’re working in hospitality in most places in the UK, and probably in Australia, too, to be fair. It’s not as customary here, either. So.
Gene Tunny 12:30
That is because we have high award wages, or well, maybe not high. If you’re, if you’re working in these jobs, you probably don’t think they’re that high. But yeah, relative to what you get paid elsewhere in the world, we’re doing the same job. It’s quite, it’s a bit higher than that. Yeah.
Tim Hughes 12:44
I mean, yeah, you get to the high end of that kind of scale, you get the concierge is at top hotels around the world. And who knows how much those guys make and women, of course, like in those roles of being in really flush hotels, where a lot of people have a lot of money and just dropping $100 bills everywhere.
Gene Tunny 13:04
Yeah, exactly. And I’ll put a link in the show notes to some of these articles I found on McDonald’s. So just put some clarity around exactly what they’re doing. That was just the first company that occurred to me, but my contention would be, and I think the evidence shows this as the majority of jobs out there. There’s no real performance related pay. Say, if you’re in the public service, generally not. Some public service agencies will offer bonuses, there’ll be some there’ll be some assessment of how you’ve gone through the year, and maybe they’ll pay you a little bit of a bonus. So a lot of that’s, I think that’s rare in the public. Yeah.
Tim Hughes 13:48
I would imagine it’s industry specific. So they’re probably like situations like that with? Well, certainly with government employees, where it will probably be difficult to put any of those kinds of things in place. Maybe not with all departments, but certainly with most we were talking earlier about it clearly is more suited to certain industries and others. And one of the interesting areas at the moment, because there’s a lot of people doing side hustles side gigs, doing their own kind of little business, while they’re still working for, you know, an employer. So their main employment is earning X amount of money every week, but putting time and energy into their own little gig, which is a tricky one, because like, you know, again, depending on what the work is, but if it’s not easily quantifiable, people can be putting less energy and time into their main job. So it’s a problem for the employer, where it’s like, clearly people aren’t getting satisfied from their roles or the work that they’re doing in that main job. And something that we both heard Phil Dibella talking about fairly recently was being an intrapreneur like so. Basically an entrepreneurial spirit within a company so you can be an intrapreneur and what you might be able to offer to that company. So, if a company is open to different sorts of ideas and innovations from within the company, then there might be a space and place for someone to grow within that company. Yeah. And and share their ideas and use that energy within within the business.
Gene Tunny 15:19
Yes, certainly. So if you can demonstrate that you’re, you are making a material impact on the profitability of the firm beyond your normal job, or what you’re doing at the moment and your job or what your role is, and you’ll make your contributions much greater than what you’re getting paid for, then that’s an opportunity to redefine your role to get a better better pay from your boss. And you can be this is what Seth Godin calls the linchpin be indispensable in the business you are and you can be a linchpin in your own business, but you can also be a linchpin in someone else’s. Yeah.
Tim Hughes 15:55
And of course, that that comes down to a symbiosis where obviously, the manager or your superior needs to be receptive to that. I mean, they need to be good ideas, of course, but if it’s a receptive environment that encourages that, they would need that to work. So there’s a few things obviously that have to come together. And again, that would be industry specific. And, you know, within guidelines or, you know, whatever, I think forward thinking companies can certainly take advantage of that, you know, with the event of encouraging intrapreneurship within their own company.
Gene Tunny 16:30
Yeah, exactly. So with, let’s think about the economics of, of all of this. So we’ve identified that there’s performance related pay in more sales and, and in real estate and in in other sales jobs. And that’s because it’s a way of compensating the top salespeople, and it motivates them, it motivates them to hustle or to work harder to make more phone calls or to aggressively go after properties to sell. I mean, what’s going on there? I mean, why is real estate different from, say, working behind the counter at office works or something?
Tim Hughes 17:10
I guess, with real estate, you make a significant sale less often. Whereas like with most retail, it’s going to be a less significant sale? pretty often. Real estate is a bit of an outlier, I think, isn’t it? Because depends where it is. And like, you know, it might be a handful of sales for some people who can do extremely well. Yeah. But you know, that it comes down to, yeah, just very few sales that are really significant. And, of course, are a big, dry periods. There’s not much happening in real estate. So it’s a very, up and down kind of market.
Gene Tunny 17:44
Yeah. So it’s obviously because or, or this, this is what I’m thinking is because this is so competitive, and there are big gains to the people who win, but the people who make the actual sale happen. There are big gains to to that company because of the commission that’s involved. And that’s shared with the agent, isn’t it? And that’s because it can’t just always observe what the agents doing because they’re often out and about, and it’s a job where they may have to work more than the usual hours, they often have to work after hours. There’s a lot of hustling involved, though, to get the sale. They might have to really go above and beyond and sharing the commission or having commission based pay. That’s a way of incentivizing them.
Tim Hughes 18:38
Glengarry Glen Ross Yeah. Like coffee’s for closers is the same. Is that same thing? Like, I can only imagine. I mean, I haven’t worked in that area at all. But I can only imagine it’s, well, pretty stressful. I mean, because if you’re not selling you’re not earning. And there’s a lot of jobs like that where its base salaries is either non existent, or it’s just minimal. So you really, the incentive is you have to you have to sell. Yeah, with real estate, it’s feast or famine, it would appear.
Gene Tunny 19:06
Yeah, I have to look more into that just exactly how they compensated. So if you’re a real if you’re an agent working at the Ray White, you’d be getting as a base salary, wouldn’t you? And then they’d be paid, you’d be getting a bonus or you’d be getting a share the commission that’s charged on the transaction, would you I would imagine, but I can’t say I’m not sure. I don’t know either. But I know I’ve got the sense that it’s related to that because Yeah, real estate is one of those industries where the high fliers the top real estate agents are just yeah, they’re they’re making a lot of money. Yeah, they appear to be making a lot of money. I know that having the BMW that’s part of the act out of the bottle. Yeah.
Tim Hughes 19:52
It’s definitely a regional thing as well. Like, depending on where you were, you’re an agent. You know, obviously the the margins are bigger in the The more expensive suburbs more competitive I imagined to. Yeah. But is that is that thing like sales is definitely the most common way of having incentives. And it makes sense from all sides and employers and employees, there’s a margin that can be shared. And it makes sense. If you haven’t made that sale, then the margin is not there. So it’s probably the most common one, and the fairest one too.
Gene Tunny 20:29
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Gene Tunny 21:04
Now back to the show. The places where I’ve seen performance related pay is in consulting. So consulting firms often have a bonus scheme run bankers in banks, for their investment bankers, they’ll have a bonus scheme, hedge funds, they have bonus schemes for their for their people. And they’ll have their salary, but they’ll also be a bonus on top of that. And the idea is that if you’re a better performer, then you can get a generous bonus. And some of these bonuses can be pretty generous, like some of the bonuses that they’ll have in the City of London or on Wall Street for some of these bankers. I mean, that can be millions, millions of pounds or millions of dollars. Yeah, because a really good year. And if, if that particular banker, or trader, if they’ve done well, or it looks like they’ve performed well, like they’ve done incredibly well in the deals that they’ve signed, or on the trades that they’ve been executed. So there’ll be some link there, and I suppose why the bonuses work there to to incentivize people as well. If you’re working in that sort of industry, you’re probably you may be highly motivated by money to begin with. And so the prospect of more money is going to motivate you to work harder. And there’s also that the inability or the, it’s something where you can’t really closely monitor what they’re doing. And you’ve got to rely upon the person putting in the effort going, they’re going the extra mile, so to speak, to get the best outcome for the business or for the for the bank or for the for the consulting firm. So billing more hours getting projects done more quickly. So you can then get another project in, send the invoices out.
Tim Hughes 22:56
So actually, I mean, to be fair, this is where a lot of problems come though, wasn’t that the foundation of the GFC with mortgages been given for properties that shouldn’t have been mortgaged? And so a lot of a lot of deals been done that shouldn’t have been done on paper were worthless, and then that started the whole GFC process. Isn’t that correct? Like? Yes, yeah, absolutely. Like it was basically. And it was that incentive to yeah, get the Commission’s that was driving those deals, you know, so if, if it’s a bad deal, then yeah.
Gene Tunny 23:30
Yeah. The mortgage originators, who were signing people up. And the story was there all these people who had who were getting loans who had no income, no job, no assets, the ninja loans they called? Yeah, yeah, yeah.
Tim Hughes 23:45
Yeah. So it’s that thing of like, getting incentives right, is really important and having transparency as well. Yeah. So clearly, there wasn’t enough transparency with that.
Gene Tunny 23:56
Well, I guess the, the incentives weren’t there, they weren’t designed well, from the point of view of the of the company or from society. I mean, they it was all about the short term, it was all about, just sign as many people up as possible, right, as many loans or get as many loans approved. And regardless of who these people are, and so, yeah, it’s people who shouldn’t be getting loans. And then you’ve got the people in the bank. So the investment banks who, then they’re bundling up all of these mortgages, some of which, the people who, who have the loans, they’re going to be the first people to just walk away when things get tough, and they can’t service their mortgage, they just walk away and then this, this was part of the problem. What was happening is that all of these mortgages that weren’t worth as much as nominally they were worth they’ll be packaged up and then sold as a financial product, the mortgage backed securities and you know there were people making money out of that. The the investment bankers who were selling that to pension funds. And yeah, they were doing well in the short term. But it was there from a longer term perspective and for the companies themselves. And for the society, it really wasn’t. It really wasn’t great. Yeah, it’s terrible.
Tim Hughes 25:23
So it can see how it’s important to get all those elements, right. Clearly, there was a lot of people, I’m sure the writing on the wall was visible for a lot of people, but they’re just getting in there and doing it while they can.
Gene Tunny 25:34
Yeah, one point I should make, I think for the companies that fell over. So if you think about Lehman Brothers, and Bear Stearns, certainly what happened, those bad short term incentives did cost them in the long term. But one of the problems with the financial crisis was that some companies that probably acted, you know, that acted pretty sketchy, pretty badly in the lead up to the crisis. Ended up getting bailed out. Yeah, yeah. So and, you know, that’s, that’s a problem.
Tim Hughes 26:07
That’s a different, a different episode as well, I guess there’s a there’s a whole.
Gene Tunny 26:10
Yeah. Too big to fail episode. This is part of the problem. We’ve got that this is what happened during that episode. During that the financial crisis that’s caused a lot of the political problems we’ve had since then, I think, because people see Wall Street getting bailed out. So Bernie Madoff went to jail, but probably a lot of other people who should have gone to jail.
Tim Hughes 26:38
Well, yeah, and it’s, it’s difficult not to be cynical, when you see people getting away with, with things where, in other circumstances, people would be sent to jail. And so yeah, having being accountable and taking responsibility should be across the board for sure.
Gene Tunny 26:57
Yeah, exactly. I was just thinking team with the consulting firm example, because that’s what I know a lot better because I was working for a consulting firm before I went out on my own. Now, I mean, my pay is purely performance based. It’s just, it’s purely performance based. Rather, there’s no salary that doesn’t, there’ll be maybe I do effectively pay myself a salary, but I’ve got to generate, yeah, I’m gonna generate the revenue. Whereas if you’re working for a firm, you can the link between the work you do and the amount of money will the salary you get is indirect. There is a bonus scheme to try to encourage people to work harder. And that certainly does motivate a lot of people in consulting firms. And that can make sense, I think, because when you’re in a consulting firm, there’s a lot of extra effort or a lot of a lot of additional things you could do that it’s hard for the employer to hold you accountable for or monitor how you’re going with those things. I mean, we’re talking about well, how well are you really putting yourself out there to try and bring in new business? Yeah, how well, are you trying to get the deals done that sort of thing? How hard are you really working? How intensively are you working when you’re working on jobs to try and do them as quickly as possible, so you can bill as soon as possible, that sort of thing can be difficult to observe. And so therefore, it can make sense for some performance related pay. And so it can benefit the employer too, because they can pay you a bit less than you expect to earn if you’re a high performer, because you’re counting on the getting a bonus. So from the employers point of view, it’s they like it because okay, it’s some of the risk has been taken by the employee. And if they’re a dud, well, if or if they have a bad year, well, we don’t pay him as much. And then okay, if they make money for us, and you were happy to share some of that profit. It’s a difficult thing to put into practice, though, in consulting firms, I think, because the amount of money in the bonus pool and this is a problem with banking to what can happen is if you could have a really great year, and you could be a star, but if overall the whole firm doesn’t do well. Say the economy has a downturn, the economy, but say you might have had a great year, if you if you’re if your bonus scheme, and I think one of the problems in practice is that many bonus schemes are like this. They’re linked to the last financial year profitability or last quarter profitability. If the firm has a bad quarter or a bad financial year, you’ll suffer even though you’re a star, right? So you’ve really got to be careful how you design these bonus schemes because that sort of thing will cause resentment because the person who thought they did really well that year they’ll be mad because they had a great year, but because the firm didn’t have a great year, they didn’t get as much money. And then the other things that can happen is that if, if you don’t design your performance related pay scheme properly, then you’re gonna have all sorts of disputes between your staff, it doesn’t necessarily encourage a collegiate environment, because you may be trying to maximise your billable hours as a share of the total billable hours on a project. And therefore you might not want to bring someone else in the firm to take part in it because you’d have to share any upside with that person. And attribution. So say someone often, often there’ll be performance related pay linked to whether you’re bringing in projects or bringing in jobs. But then how do you attribute the contribution of bringing in the job? Does the fact that my cousin your consulting business, that he knows the person, he’s got a contact in the energy business and then the person there rings up Mike and says, Oh, Mike, do you know anyone who could help me out on on this job? And Mike goes, Oh, yeah, Janine over there. She could probably do it. She’s got the skill set. And then Janine talks to I didn’t give the guy in the energy business, and I did a berry berry. Berry. And then Barry goes, I’ve got this problem, I need this, this issue analysed. And Janine goes, Oh, yeah, I can do that. I can build this sort of model. And Janine does this really big pitch, she does this really great proposal, which convinces Barry that she’s going to solve his problems. And then Barry goes, Oh, that’s great. I’ll give you this big contract to deliver that. And then she goes, oh, that’s great. And then, and then Mike goes, hang on. I’m the one who introduced you to Barry. Yeah, yeah, I want 50% of that, if any profit on that job.
Tim Hughes 31:53
And Janine did 90% of the work? And yeah, it gets tricky, for sure. And I think this is where it’s industry specific. And also, you don’t want to create an environment where people are jealous, and and sabotaging other people that you don’t design it. Well, that’s exactly. So this is the thing. And I think this is where it gets industry specific. Because and this is also where intrapreneurs can help because you have to come up with your own solution, you have to come up with your best design for the situation that you’re in. There’s not one that sort of suits all.
Gene Tunny 32:25
Well, I think the best thing is, is actually to be generous. And you you win overall, you win the long game by being generous. Yeah, it’s that it’s a win, win and grand he’s got that give and take is that Adam grants thesis, I can’t remember. I’ll put a link in the show notes. But I think you do better in the long run by being generous and not being greedy.
Tim Hughes 32:49
Isn’t it one of Stephen Covey’s Seven Habits of win win? That’s, I think so. So because that’s, that’s basically what it is, isn’t it? Because, yeah, one you want it to be any incentive shall be a positive thing within a team with, you know, for an individual within a team within a department and company. Yeah. And you can have friendly competition and everything. But it’s so easily done, where it can be a negative force, you know, like, yeah, tricky, tricky thing.
Gene Tunny 33:17
And I must admit, I mean, I’d probably, maybe I wasn’t as collegiate as I should have been in jobs where I’ve had a bonus where there was a bonus scheme. And I look back on that and think, Ah, I probably wasn’t always being a team player. And I regret that. But that’s just the way it’s set up. So you got to set up the system so that it does encourage collegiality, and it doesn’t just rely on people doing the right thing out of the goodness of their heart, because when money’s involved, they won’t necessarily do that. It’s a good boy,
Tim Hughes 33:48
it’s a good point, actually, like you can design this around the behaviour that you want to encourage, you know, so if you can imagine that, it might encourage negative behaviour, like, you know, if it’s not a fair system, then you can end up with someone that happy employees.
Gene Tunny 34:04
Yeah, so I’m gonna have to try and dig up some examples of bonus schemes that work because I’ve seen various bonus games, not necessarily, I’m not necessarily making a comment on any organisation I’ve worked in. I’m talking generally about consulting businesses I’ve seen because I’ve known a lot of people who do consulting work, and I’ve heard of various different models. I haven’t heard of one that seems to get everything right. There seems to be issues with all of them. I don’t know how you design it, but you certainly have to have your bonus linked, not just to the short term results, but to the longer term outcomes, they maybe have to have it linked to profitability over several years. Yeah. which avoids the issue of well, what if someone has a great year but the whole company doesn’t do very well? And then they don’t have there’s no money to pay the bonus. And you also want to see whether, okay, maybe this person, you don’t want to pay someone a bonus if they’re actually making things worse in the long run, because they’re because they’re really toxic to work with, like, they might be a high performer, they might be generating a lot of sales or doing a lot of work. But they could be a nasty piece of work. And that’s no good for your company’s morale of other team members for your reputation.
Tim Hughes 35:19
It’s actually interesting, because it would be very hard to imagine a perfect system for any scenario. So I would imagine that any good incentive scheme would be constantly evolving, constantly being receiving feedback and, and changing because of all those reasons that we’ve mentioned, you know, like people who might just be a passenger and thinking I’ll just do as little as possible and, and try and, you know, right off the back of other people’s hard work, if it was a team incentive, you know, so it would have to be a very flexible, mobile kind of incentive system, you would imagine.
Gene Tunny 35:53
Yeah, I might look more into this. What are some examples of schemes that have done? Well, because there’s been, there must be a literature on this. So there must be people must have written about this. But what I’ve done is to prepare for this conversation, as I’ve looked up, or what is generally what does the economic literature tell us about the you know, the effectiveness of performance related pay? And? Well, as you probably expect, given that we do see examples of performance related pay out there, it must work, right? Companies wouldn’t be adopting it if it if it didn’t work in some way. And so there’s a great article on the IZA website. So that’s an institute that looks at labour market issues, I think it’s German. So the Z must mean something, mister, must be some German words, starting with Z. I could be wrong about that. I dont know why its IZA, I don’t know exactly why it’s IZA. But there are a great think tank that looks at labour market issues. There’s a great article by these two Italian academics performance related pay and productivity, I’ll link to it in the show notes. And what they find is, so the pros of performance related pay, linking paid or performance is expected to increase worker motivation, effort and loyalty to the firm, pay incentives, raise job satisfaction, lower absenteeism and turnover rates and have a sizeable effect on company performance. Right. So they’re actually finding that their review of the literature tells them that it’s a positive thing. They’re saying that this is a good point, I think the diffusion of remote work may involve a shift from input to output based compensation schemes such as performance related pay, I think it’s a really clever point. What that saying is that as more people are working from home, we really have to start thinking about performance related pay, because there’s less well, in the old days, I mean, where you had to go into the office, then that was how you were signalling your contribution of the firm, wasn’t it? That was your you were you were visibly in the office or you weren’t there. And then the boss could come and give you the tasks to do. And so I guess, just hourly base pay made more sense in that environment than if people are working at home where we’ll really when, when we’re during COVID. And afterwards, we’ve made this shift to working from home and now the boss isn’t really observing whether you’re turning up for work or not, are they they’re just they just expect you to get a certain amount of work done. Yeah. And to be contactable, generally, I mean, available. So it’s a different sort of thing. And so I guess it would force us to think more about how we could design a performance related pay scheme for jobs where in the past, maybe we didn’t have a performance related pay scheme, even though possibly they were amenable to one or they could have, there could have been a performance related pay scheme. But because of the power of debt, well, the status quo inertia, perhaps we didn’t think about that. It’s an
Tim Hughes 39:03
interesting point. Because in that situation, if it’s task based and say somebody’s working from home, it’s performance based, you’re not getting paid any more necessarily, or that might be part of the deal. But if you can do your work in six hours instead of eight, your bonus is you get two hours to yourself to do something else. So I think it’s really interesting point because I think looking at work to be quantifiable by tasks done and those kinds of things if possible, again, it’s an industry specific kind of thing, then absolutely. If you get the balance, right, where the right amount of work is fair within a certain period of time, then yeah, allows people to do that work well within that timeframe or not.
Gene Tunny 39:47
Yeah, another point they make is that digital technologies may improve performance measurement, thus improving the targeting and performance related pay. So how to think more about that in In professional services, jobs, that’s probably less relevant because you do see, I mean, you’d see the the effectiveness of their work in terms of how well, their their products or whatever they’re doing. They’re, you know, are they completing jobs on time? Is the customer satisfied? I’m not sure exactly what that points getting out there. Maybe I’ll have a closer look at the article. But I suppose if you guess you could really, you could monitor what they’re doing. If you mean, that sounds awful. But if you’re recording their screen, or their time spent on the computer, perhaps I mean, I’d hate to do a job like that if someone was doing that.
Tim Hughes 40:42
Yeah, I guess, if it’s tasks, down to what tests are being done, then you can quantify it that way. But for sure, I mean, to be fair to employers, like there’ll be employees milking, you know, the opportunity to work from home, you know, so it’ll be, it’ll be sort of a bit of give and take from both sides, I imagine as to the benefits of that. And again, industry specific, the creative industries. I know, for instance, I got a good friend who is in architecture, and that kind of industry is very collaborative. And so the value of having people in the same place and the interaction is and that energy is really valuable to that kind of industry, where you lose that when everyone’s working from home. So it does, it does have different impacts for different industries, for sure.
Gene Tunny 41:33
Yeah. So I’ll go over the cons are trying to get through these quickly. The effects of performance related pay schemes differ significantly, according to their design and the types of firms. Okay, so we were talking about before about how like performance related pay is going to make more sense in some circumstances and others in terms of the design, one of the points they make here, in the author’s main message. So they say that individual schemes linked to performance have been shown to be associated with higher firm productivity, while group performance related pay and financial participation generally exhibit smaller effects on performance. Right. Okay. It’s the individual incentive that matters. I mean, that that makes sense. Because if you’re say there’s a group incentive, there’ll be people in the group who are thinking, Well, I mean, I can end up working a lot harder. But if Jack doesn’t pull just doesn’t do work as hard as the others don’t, you know, they really don’t work any harder than I could do all this extra work, and we’re not going to get the prize anyway. So why should I bother? That’s what’s gonna happen, isn’t it?
Tim Hughes 42:42
Every scenario you can imagine will be happening somewhere. So yeah,
Gene Tunny 42:45
yeah. I mean, that’s a, I think that’s the issue, or it’s less likely that you’re the relationship between the performance of the firm, and you’re relying on the other group members to perform. Whereas if your incentive is linked to how you perform, then I think that’s more of an incentive to work harder, because it’s not, you know, it’s not contingent on the others working hard as well.
Tim Hughes 43:14
I hadn’t thought about it before. But the ultimate incentive scheme that works, the fairest is when you’re self employed. And you, you know, whatever work you you do and bring in is, that’s your income. Well, that’s the fairest of all incentive schemes, you know, and anything beyond working for yourself, like with more people just gets trickier and trickier, I guess, you know, like, there’s more things to consider as to how it might be fair. But yeah, if you’re working for yourself self employed, that is the ultimate payment incentive scheme.
Gene Tunny 43:45
Yeah, you kill what you ate. Now you eat what you kill.
Tim Hughes 43:49
Well, to be fair, if you’re gonna eat it, it’s probably gonna die in the process if you haven’t already killed it.
43:54
I think that’s what they say. You eat what you kill. Is that it? Yeah, that would make sense. Yeah,
Gene Tunny 44:00
I think so. Yeah, I’ll go with that. I’m pretty sure I’ve heard that it’s some of the consulting firms have worked in.
Tim Hughes 44:06
But it’s fair. And that would be the thing of like, you know, you you get out of it, what you put in and that’s pretty much every case of being self employed, you know, a very fair and reasonable way for for things to unfold.
Gene Tunny 44:19
Yeah, yeah, exactly. Okay. Now, some of the other cons. When pay incentives are real design, the effects can be perverse and counterproductive. And I think we’ve covered that. Yeah, about the problems that can happen. If you have badly designed schemes. People don’t work together. I mean, you could even have some people who are deliberately they could sabotage the work of others to make themselves look better. It’ll be happening, that hoard information. Yeah.
Tim Hughes 44:49
But that’s where I think the flexibility and you know giving allowing people to contribute towards these schemes, I think would be a good thing. And you can only imagine that that would make for a better scheme if people had a little bit of autonomy or choice in in how they worked.
Gene Tunny 45:08
Yeah. Another couple of good points on the cons when performance is difficult to measure or when employees intrinsic motivation is relevant, performance related pay may generate distorted incentives and have unintended consequences on worker morale. So I think that maybe that’s the case where somebody thinks that, well, I’m actually making a huge contribution to the company, but because of the way that the incentive scheme is structured, and what what it measures, so particularly if you’re in a support role, so say the, it’s the, the bankers or the consultants who are getting the bonuses, but someone who’s in a support role, maybe they’re an executive assistant, and they’re not getting, they’re not getting a bonus, because their output is less the contribution they make to the profitability, the firm’s less recognisable, then maybe they get their morale starts to suffer. I don’t know if it’s exactly what they’re if that’s what they’re driving out there. But I think the point, that point makes sense to me that the other con that they identify is that linking pay to performance may generate excessive stress and be detrimental to long term performance. Now, I guess that’s correct. So this is where you got to get the balance, right? Because if you’ve got a lot of your workers compensation linked to performance related pay is also linked to performance. So a big part of their compensation is expected to be the bonus. And their normal salaries lower than that could put a lot of pressure on them. That could create a lot of stress for the worker.
Tim Hughes 46:46
Yeah, for sure. I mean, because there’ll be, again, industry specific, but depending on seasonal, or, you know, upturns downturns in markets, you know, can be things out of their control. So there’s certainly situations where you’re willing and able to work, and there’s no work there to be done. So, you know, real estate’s a good example of that, you know, when, when no one selling well, no one’s making commission, you know, so that would certainly be, you know, relative to the real estate market. But yeah, you know, yeah,
Gene Tunny 47:17
I’ve got to look more into exactly the compensation schemes there. I thought I understood it. But when I started talking about it with you, it was clear my level of understanding was not at the level it should be. So I’ll try and clarify that. But I think yeah, that’s a good example, where there is performance related pay, okay, well not try and wrap this up. I will end with the author’s main message, their final words here. So performance related pay is a relevant policy to improve firm performance, and competitiveness. Although the adverse effects on work intensification and employees physical strain and psychological stress should not be overlooked. Looking forward, new patterns of work from home and remote work will increase the relevance of performance related pay. Yep, yep. I think that’s probably true. Because it’s not about how many hours you turn up to the office for. I mean, one of the issues I had when I was in the workforce many years ago was because I, I like to walk around. And I mean, I like to think I did a lot of work when I was working for companies, or for public service, or whatever. But one complaint, and maybe this happens in every workforce, but there was one, at least one or two times when there was a complaint made that I wasn’t at my desk enough, or I wasn’t in the office, because I was that was walking around thinking about a problem, or I was out trying to hustle. And yet, I’d be someone would criticise me because I wasn’t actually at work. And that’s the wrong way to think about it, isn’t it? I mean, it’s, it’s what you’re achieving, ultimately.
Tim Hughes 48:59
Completely, I mean, I guess, you know, that would be a good case for, you know, what work has been done, you know, and who cares who’s walking around, it’s, you know, it’s very good for you. But if you’re getting the work done, because, I mean, that’s definitely a thing where people might be busy, they might be work for many hours, but they’re not necessarily being very productive. And when there’s presenteeism, where people can be at work, and just not very good. Yeah. And especially when they’re side gigs happening, you know, because their energy and thoughts are being put to another, another pursuit. So in containing that, now, if any managers out there looking to encourage intrapreneurship, you know, this is possibly worth looking into.
Gene Tunny 49:43
Yeah, we’ll have to get Phillip Di Bella on the show to chat about that, because Phil’s just around the corner.
Tim Hughes 49:49
Yeah, he’s got a lot of good stuff. And that was when I hadn’t heard that term before, intrapreneur. But it makes a lot of sense because it’s an outlet for people who have ambition, but don’t Uh, you know, you don’t necessarily have to leave your job to have ambition. So yeah, it’s, um, depends on the culture within that company whether they can allow that to happen or not.
Gene Tunny 50:10
Exactly. Okay. Do you have any other thoughts, Tim, before we wrap up?
Tim Hughes 50:14
No, I just got to make sure that whatever I’m eating is dead before I eat it and hopefully, hopefully I can bring something in to keep me sustained.
Gene Tunny 50:20
Fanastic. Tim, thank you so much.
Tim Hughes 50:25
Thanks, Gene. You’re welcome.
Gene Tunny 50:33
Okay, I hope you found that informative and enjoyable. My main takeaway from looking at performance related pay is the importance of getting the design of the scheme right. So you actually motivate good behaviour. You end up with some bad behaviour if you don’t get the incentives right. As Tim and I discussed, on balance performance related pay schemes can be beneficial and boost overall business productivity and profitability. But that’s not guaranteed. We see that individual incentives work better when teamwork is limited, as in real estate, but they can be problematic when teamwork is required. One thing I should have noted in the main conversation is that rewards don’t have to be monetary. In a 2009 article on performance related pay, which I’ll link to in the show notes The Economist observed in their 1982 book In Search of Excellence, Tom Peters and Robert Waterman mentioned the great variety of non monetary incentives used by the excellent companies that they studied. They said that excellent companies actively look for excuses to hand out rewards. at Hewlett Packard, for instance, they found members of the marketing team who would anonymously send one pound bags of pistachio nuts to salesman who sold a new machine. That’s a bit of a quirky example, but it does illustrate that rewarding high performance and then be complicated. Celebrating wins with a team dinner or pizza night could be good for team morale. For example, I’ll put links in the show notes to articles mentioned in the episode, including to the eyes at a article on performance related pay and productivity. It’s really good and it’s easy to read. I’ll also add some links on how real estate agents get paid and on performance related pay at McDonald’s. This is how you can check out what McDonald’s has tried in Australia and in the UK. The Australian scheme does look better designed than the British scheme, because the Australian McDonald’s employees get extra benefits based on the individual performance rather than their team performance. My suspicion is that a group based incentive may be too weak to motivate performance. That said individual incentives can be difficult to apply when people have to work very closely together, and where it’s difficult to assess individual contributions. And in many businesses, teamwork is probably something you want to encourage. So it may be that you need to have a group incentive scheme of some kind, or an incentive scheme based on a mix of individual and group incentives. I’d say that you need to look at businesses and their workforces on a case by case basis to work out what’s right for that business. For now, I’d note that one of the major concerns with group based incentives is the free rider problem. Some employees may try to freeride on the efforts of other team members. However, there’s an intriguing new quasi experimental study which suggests the free rider problem may not be a big deal for some companies. The study was done by Anders Frederickson, Daniel Hanson and Colleen Flaherty Manchester, from Office University Siemens Gamesa in the University of Minnesota respectively. The researchers have written about the study in an ice at a discussion paper and an Avox EU article that I’ll link to in the show notes. They took advantage of the fact that a European dump truck manufacturer, high dreamer, introduced a group based incentive scheme and it’s planned in Denmark but not in Germany. Hence, they could treat the workers at the plan in Denmark as a treatment group, and the workers in Germany as a control group. The researchers then use what’s called difference estimation to establish that the group based incentive scheme increased performance by 19%. The researchers note that, despite free writing concerns stemming from group based incentives, being part of a group may have influence workers paid based on the performance of the group will naturally not tolerate that team members shirk, which leads to peer pressure. And team members even without peer pressure may feel some kind of internal pressure such as guilt or shame if they do not deliver in a team context. Okay, that sounds like a fair point to me. This new study adds to a small number of existing studies that actually suggest group based incentives can be beneficial in some businesses, particularly whereas there’s a close knit group which can prevent members from free riding How widely applicable is this finding? It may be too hard to say based on the limited number of studies so far, I might have a closer look at the evidence regarding performance related pay schemes and return to the topic in a future episode. But for now, I hope the discussion in this episode helps you understand the relevant issues and trade offs. Okay, please let me know what you think about this episode. What were your takeaways or thoughts on performance related pay? Do you have any experiences with performance related pay that you’d like to share? Where you’d like me to take a closer look at some of the issues covered? I was thinking that it may be worthwhile having a bonus episode discussing the methodology of the hydrangea study, as the difference in differences method can be very powerful. Let me know what you think. Feel free to email me at contact at economics explore.com. I’d love to hear from you. Thanks for listening. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@ economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
56:43
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
